In this report we demonstrate how we have used scenarios to enable some of our clients to consider the potential impact of climate change on pension scheme funding.
Download our Climate Change Challenges
here.
In September 2018 we produced our note “Climate Change Challenges – Climate change scenarios and their impact on funding risk and asset allocation”. The purpose of this note is to show how we have used these climate change scenarios for a couple of clients.
Our Deterministic scenarios are a way of enabling trustees and companies to ask “What if…?” type questions:
- These are used extensively to stress test and consider the impact of different events / outcomes
- These are designed to sit alongside our stochastic models
- Each scenario provides a detailed explanation of how the story unfolds, and describes how economic and financial factors evolve over the projection period
Our climate change scenarios are considered over different time horizons:
- A long-term horizon (eg 20 years) over which physical climate change impacts are likely to be felt
- A short-term horizon (eg 5-10 years) because the impacts of financial markets could be felt a lot earlier
The main purpose is to allow the trustees and companies to understand the risks (and opportunities) from climate change. This then provides a framework to consider how these risks can be managed and opportunities taken.
- Stress test and consider outcomes
- Detailed explanation of how the story unfolds, and describes how economic and financial factors evolve over the projection period
- Next five years
- Long-term (eg 20 years)
- Risk mitigation
- Investment opportunities / risks across asset classes, sectors, geography etc.
- Consider impact on funding and covenant