Responsible investment

Climate scenario analysis: Assessing the future for investments

  • Climate change scenario analysis seeks to understand the future impact of global warming. It is currently the leading edge of thinking for investors and businesses striving to assess how climate change will affect them. This has been driven in part by the recommendations of the Task Force on Climate-related Financial Disclosures, which includes forward-looking assessments of climate-related risks and opportunities.
  • AXA Investment Managers has spent the past year studying climate scenario analysis. We have focused on an approach which tests the alignment of investment portfolios to future global warming outcomes – essentially measuring portfolio temperature. In this paper, we detail the thinking we have developed around this specific scenario analysis approach.
  • The primary conclusion is that portfolio alignment climate scenario analysis can be established. But we have also identified clear areas which need further refinement – especially around the limited climate-related data available. This remains a work in progress for investors.
  • In terms of stopping climate change, time is not on our side. One objective of this paper is to provoke discussion and to further the investment and business communities’ approach to mitigating global warming. We encourage constructive feedback from all stakeholders. This is aligned with our ambitions as a global asset manager to contribute to the United Nations Sustainable Development Goals – including Goal 13: Climate Action.

Climate change poses a grave threat to both the environment and society. Many of us are increasingly in agreement on that point but remain divided on exactly when, and how severely, this risk will affect us. Long-term investors face the major challenge of understanding and preparing for the possible wide-ranging effects of global warming on their investment portfolios.

‘Scenario analysis’ has been put forward as a technique to assess the future implications of climate change for both companies and investors. The call to do this has been led by the Task Force on Climate-related Financial Disclosures (TCFD), an influential cross-industry initiative that aims to establish a consistent approach to financially-material climate change related public statements. It recommends that scenario analysis features as part of the forward-looking assessments of climate-related risks and opportunities. Nevertheless, the implementation of climate scenario analysis by companies and investors is still in its infancy.

There are three key drivers that we believe can shape scenario analysis and impact results:

1. Carbon budget: How much carbon dioxide and other greenhouse gases do we emit into the atmosphere?

The more emitted on a netted basis, the higher the temperature.

2. Time: What is the time horizon under which these tests are being considered?

The longer the time horizon, the more uncertainty is involved in the test.

3. Scenarios: What data and assumptions underpin the climate change scenario being used?

Scenarios paint varying – and at times, radically diverging - visions of the future.

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