- Organisation: abrdn
- Signatory type: Investment manager
- HQ country: United Kingdom
Provide a short overview of the research innovation being proposed for the award, including how it is innovative.
abrdn has developed a market-leading climate scenario and analytics platform, which provides investment insight missing from standard approaches.
- assumes uniformity of climate policy across geographies and sectors;
- doesn’t benchmark results against what’s reflected in asset prices;
- is based on a single view of future technological change;
- uses a limited suite of ‘tail’ scenarios that ignores more likely outcomes; and
- doesn’t take credible corporate energy transition plans into account.
This approach generates misleading results for the probable effects of different scenarios and can provide little insight for investors who want to incorporate scenario insights beyond identifying tail risks, or providing benchmarks for net-zero alignment.
In contrast, abrdn’s approach is designed to counteract these limitations by:
- reflecting critical regional and sectoral characteristics;
- allowing a much larger proportion of the probability distribution to be considered and the creation of a ‘mean’, or most likely, view;
- including a baseline reflecting what’s currently priced into the market;
- considering the impact of company transition strategies; and
- communicating effects via proprietary asset and fund-level tools.
These innovations help identify more realistic climate-related risks and opportunities – enabling investors to build more resilient portfolios, encourage positive change at investee companies through better engagement, and generate better long-term returns.
Provide a description of why you decided to undertake this approach.
Asset managers have a responsibility to their clients to understand how the different dimensions of climate change may affect the companies and markets in which they invest. Given the uncertainty around how policies, technologies, and physical impacts will unfold in the future, investors need to conduct a rigorous, forward-looking, and quantitative assessment of the potential effects to inform their decisions.
Typical analyses tend to provide very simplistic assessments, often based on assumptions of highly-unlikely uniform climate policy and inflexible technology development pathways across geographies and sectors. They risk generating misleading results. That is why we developed this proprietary approach, with our modelling partner Planetrics, which integrates our own research-driven insight into how climate-related policy and low-carbon technology pathways will vary across geographies and sectors.
Traditional approaches fail to capture the potential for companies negatively exposed to the energy transition to alter their strategy and set targets, driven by economic or reputational risks. In response to this limitation, our analytics platform is incorporating company transition plans, along with a unique credibility framework within which these plans can be assessed.
We see this as an ongoing process. That is why we run annual updates – our commitment to innovation and flexibility – which ensure the platform can:
- reflect any change in outlook for transition technologies;
- incorporate more ambitious, durable and credible regional policy commitments;
- provide asset-level details of drivers of valuation uplift or impairment; and
- capture credible corporate transition plans and their implications.
Provide an outline as to:
- The value this approach has provided or a summary of the key conclusions.
- What you have learned from this approach or report that can be applied more broadly.
abrdn’s climate scenario and analytics platform is leading the way in providing critical insights to inform investment decision making, engagement, and reporting.
- It highlights the importance of an approach that is flexible and reacts to changes. For example:
- Included in the latest analysis is a baseline assumption that markets are pricing in a faster energy transition than was the case before the pandemic. This is especially the case for firms that are pure plays on zero-carbon technology deployment. This means greater discrimination in stock selection is required to capture the opportunities, and this is being facilitated via the regional and sectoral detail incorporated in this framework. Further elaboration can be found here.
- It shows how incorporating regional insights into scenario analysis generates critical forward-looking observations. For example:
- The Asia-Pacific (APAC) region will be a key battleground in the world’s fight to decarbonise energy systems and to keep global temperature increases as close to the objectives of the Paris Agreement as possible. But the region is extremely diverse, with economies at vastly different stages of development, carbon intensities and climate policy settings.
- By building in inter-regional variation and providing intra-regional analysis, our platform provides critical forward-looking insights into how APAC companies’ potential climate exposures differ from one another, as well as from their counterparts in other parts of the world. This provides a strong and unique supplement to active stock research, selection, portfolio construction and engagement activities. Further elaboration can be found here.
- It delivers an understanding of climate risk and opportunity on a wide range of levels. For example:
- The analysis shows that while likely impacts at the aggregate index level are modest, there is a large dispersion of risks and opportunities within, and between, sectors and regions. Our proprietary tools quickly highlight the importance of that dispersion within a sector or portfolio.
- In addition to aggregate insights at index, sector, region, portfolio and asset level, our analysis drills further down to consider the relative effects of demand dynamics, carbon costs, market dynamics, physical impacts, and the adequacy of measures that companies can (and are) implementing.
- It shows the importance of including company-level transition strategies. For example:
- Our analysis shows how existing company targets may not be sufficient to mitigate transition risks. Scopes 1 & 2 emission targets alone are not sufficient in sectors with high-demand destruction, as the benefits from decarbonisation do not offset declining demand for fossil fuels and products such as internal combustion engines.
- It gives the forward-looking insights where investment teams need to robustly incorporate climate change risks and opportunities into decision making. For example:
- The analysis has provided insights into the potential size of the opportunity for individual assets and highlighted where these are not reflected in market pricing. This gives us greater confidence to utilise those insights, alongside other active sector- and asset-level research, to inform stock selection and portfolio construction.
- The platform is accessible to all investment teams, encouraging its insights to be integrated across the business and informing external engagement.
- It evolves to improve coverage across multiple asset classes. For example:
- It currently covers over 22,000 listed equity and 50,000 credit securities, and will be extended to include real estate assets. Insights can also be used to estimate impacts on private equity assets, for which data is otherwise insufficient.
- Our platform provides a new benchmark and possible blueprint for other financial institutions to improve their own climate scenario analysis. This will assist our industry in the shift towards more optimal management of climate risks and opportunities.