Eastspring Investments: Responsible Investment Report 2022
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Medium to longer-term projects
Summary of the scenarios used Orderly transition scenario : This ‘below 2°C scenario’ includes transition impacts as well as physical impacts in line with a 1.6°C increase in temperature by 2100 compared to the average temperature between 1850 and 1900, in line with the IPCC Representative Concentration Pathway (RCP) 2.6, through the orderly introduction of climate policies. Ambitious climate policies are introduced immediately. However, even as emissions are lowered, acute and chronic extreme weather continues to increase compared to today, resulting in increased physical loss and damages. There is a marked reduction in fossil fuel demand, higher carbon taxes and investments in low carbon electricity generation and manufacturing. Disorderly transition scenario : This ‘below 2°C scenario’ includes similar levels of transition policy assumptions and physical impacts to the orderly transition scenario, but the policies are introduced in a delayed and disorderly manner resulting in increased market volatility in the medium term. There is increased volatility in the fossil-intensive sectors and regions, however due to the disorderly nature of implementing climate policies, there is also increased volatility in all sectors. Hot house world scenario : This scenario includes physical impacts in line with a greater than 4°C in 2100. The physical impacts include irreversible damages to the climate, resulting in extreme increases in acute and chronic extreme weather in line with RCP 8.5. For example, many countries suffer extreme droughts and water shortages. Some regions will experience greater levels of warming of up to 5.6°C, resulting in certain parts of the world becoming unfit for agricultural production and human habitation. No further climate policies are introduced in this scenario beyond those already announced with little transition impacts assessed.
The trajectory of climate change discussions is evolving rapidly between changes to regulatory guidelines, updates to climate science, and enhancements to data sets. These advancements have provided insights in our approach towards medium to longer-term projects, which are extensions of the near-term projects. Portfolio Forward-looking Metrics As a next step, we have been exploring forward looking metrics such as CVaR and ITR to gain a better sense of the forward- looking risk profile of our portfolios. Leveraging on analysis conducted by Prudential, three representative scenarios have been selected. We use the orderly transition, disorderly transition and hot house world scenarios aligned to those provided by the Network for Greening the Financial System (“NGFS”), to identify risks over the short, medium, and long term. These scenarios are very rich in detail, providing high levels of insight into the financial implications that could emerge from such pathways. These three scenarios provide plausible future outcomes and are constructed to simulate the complex and non-linear interactions between energy, economy, and climate systems. They also account for various policy and technology developments, supporting a sophisticated exploration of different plausible futures, and an understanding of the impacts from trade-offs between the policy and technology options. A key difference between the calibration we use for these scenarios, versus the NGFS’s calibration which uses general equilibrium economic models, is the use of non-equilibrium economic models: we believe the non-equilibrium economic
risks and transition risks. The development of these metrics and the multi-decade assumptions incorporated into their calculation continue to evolve and improve, and we expect greater utility for investors over time. An in-house dashboard has been developed and customised to include the above three key scenarios, to help streamline datapoints and focus future discussions on the drivers of these scenarios. This has helped to enhance internal reporting to include CVaR as an indicator of the forward-looking exposure on the investment portfolio’s exposure
models better allow for real-world inefficiencies and decision making that could be expected to be part of the transition to low-carbon economies. The following presents a summary of the scenarios, including the range of climate- related events considered in the scenario testing work. In 2022, work commenced on exploring various climate scenarios and the corresponding CVaR and ITR measures reflected for our investment portfolios. We embarked on a journey to better understand these forward-looking climate risk metrics, which includes both physical
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