We don’t know what an investment strategy aligned with a 2-degree pathway scenario looks like, at least in a meaningful or absolute way, according to Russ Bowdrey, senior ALM manager at Aviva.
Speaking on a panel at Insurance Asset Risk 2020 EMEA, taking place today, Bowdrey said: “The modeling that is required to work this out is contingent on a lot of approximations: you have to think about the firm you are looking at, how you project their revenues into the future, how those revenues are tied to emissions, the feasibility of new technology coming along like carbon capture stations and how that would discount back into the valuation of what you are trying to do. And, lastly, [you have to] attribute all of that to what it means to the future temperature of the world.”
The uncertainties of the argument means trying to say ‘my portfolio is 3.6 your portfolio is 4.2, mine is better than yours’ is actually broadly wrong at the moment, he argued.
But all hope is not lost, according to Browdrey. Insurers can still use these metrics as relative measures to identify hot spots in their portfolios, which can then be analysed more deeply by their asset managers or risk departments, he argued.
According to fellow panellist Johanna Köb, head of responsible investment at Zurich, the challenge is that there is a very limited selection of companies that are currently compliant with the 2-degree pathway scenario.
For an investment strategy to be compliant with such a scenario, a firm would have to invest only in businesses that are compliant today and exclude everything else from their portfolio.
“That is a false positive because the economy is not compliant, if it were we wouldn’t be in trouble, which we are looking at the rising temperatures,” Köb said. “The only thing that actually helps is not to divest everything and allocate to the couple that are already compliant but put your money to work to move the rest.”
Köb called on more investors and stakeholders to join the effort to integrate climate risk into investment decisions, arguing “that we need more brains, friends and money on that journey”.
Also on the panel, Foresters Friendly chief investment officer Corrado Pistarino said climate change friendly investing may be catalysed by the pandemic the world is currently going through.
“It has shown how a massive crisis could affect economic activities, disrupt business and supply chains,” he said. “And there are a lot similarities between the pandemic and potential climate crisis so we are probably also at a juncture where public discourse around big systemic risk like climate change could find a very receptive audience.”
Carlota Garcia-Manas, senior responsible investment Analyst at Royal London Asset Management, said the investment chain needed “more education, more transparency of information and a very clear disclosure about limitations and assumptions”.
Browdrey concluded: “Climate risk is a commercial risk and an opportunity and this is not about doing the right thing anymore this is going to impact your balance sheet and your bonus within the next decade. You and your organization need to commit and become accountable. Try to look past the complexity - try to work out the outcome you need for your clients, your balance sheet and what trends you need to establish to achieve that.”
More information about the event and how to attend is available here.
Channels:Risk