Asset owners will need high-quality and timely data on climate-related risks to help guide them through the energy transition.

The FSB Taskforce on Climate–Related Financial Disclosures (TCFD) provide a global framework to translate non-financial information into financial metrics. The TCFD has been endorsed by over 238 companies, including 150 financial institutions representing a combined market capitalisation of over US$6 trillion and US$81.7 trillion assets under management.

Yet, what would adopting the TCFD recommendations mean in practice for asset owners? This publication provides technical guidance on:

  • the actions for asset owners;
  • example of peer asset owner practice on implementing the TCFD recommendations and reducing exposure to climate risk;
  • questions to engage consultantsor fund managers on TCFD;
  • climate scenarios.

Crafting an investment strategy

Engaging with fund managers on the TCFD recommendations

Asset owners can engage with fund managers on climate-related risks and opportunities and encourage them to support the TCFD recommendations, including asking questions such as:

Organisation-wide support for the TCFD recommendations:

  • Does your organisation support the TCFD recommendations?
  • If no, please explain the rationale behind this decision
  • If yes, when do you anticipate an implementation plan will be implemented?

Governance

  • Has your organisation included climate-related impacts as part of the board and/or management group’s oversight responsibilities?
  • How is progress reviewed, by whom and how often?

Strategy

  • Is there a firm-wide strategy in place to identify the risks and opportunities related to climate change?
  • Has the organisation considered the impact of climate-related scenarios on future outcomes in terms of expected risk and return, as well as the identification of new opportunities?

Risk management

  • Has a process been established to assess and integrate climate-related investment risks (transition and physical impacts) into investment decisions?
  • What is your process for monitoring these risks over time?

Metrics and targets

  • What climate-related metrics, if any, does your organisation use?
  • Can you describe how these metrics have impacted on investment decisions?

Climate scenario analysis

Scenarios analysis is the process of estimating the expected value of a portfolio after a period of time. Depending on the availability of the data and the maturity of the process, scenarios can be either for:

  • Context exploring (narratives about the future)
  • Decision making (forecasting)

Climate scenario analysis is, at present, arguably closer to the former and therefore not necessarily a forecast. The purpose of climate scenarios is to assess the potential earnings impairment of companies (as a result of transition policies, demand changes, physical impacts and other factors) and how this might translate into investment returns in a portfolio. Uncertainty exists in terms of the rate of warming, pace of technology change, future government policy – yet the uncertainty is not infinite. The value of climate scenarios is to test the extremes. Thus, it is important to avoid relying on a single reference scenario, otherwise the analysis risks becoming a prediction. 

Four step approach to integrating climate scenarios

 

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