USS co-authored report says ‘paradigm shift’ required to meet … – BusinessGreen

A “paradigm shift” is required in the climate scenarios used by investors, businesses and governments to combat climate change, according to a report published by the Universities Superannuation Scheme (USS) and the University of Exeter. 

The report, No Time To Lose – New Scenario Narratives for Action on Climate Change – published last week – found the current scenarios used by investors to address climate change have “significant limitations” in their efforts to combat climate change and reach net-zero emissions by 2050.

The report backs up research earlier this summer from the Institute and Faculty of Actuaries and the University of Exeter, which revealed climate scenarios in financial services “significantly underestimate risk”.

The report found current scenarios are focused on long-term transitions over multiple decades, which it claims are not realistic and pay an insufficient amount of attention on shorter-term geopolitical risks and volatility in the financial markets which would impact how the measures designed to reach net zero by 2050 would be implemented.

It noted that, in order for the net zero targets to be reached, global emissions would need to be halved by 2030. Therefore, it said investors would need to shift the focus of their climate scenarios to pay closer attention to shorter-term challenges and risks such as global politics, financial markets and extreme weather events, to assess the long-term financial impacts of climate change.

The report sets out four prospective climate scenarios to 2030 which are designed to increase focus on the short-term risks and opportunities which will influence investment-related decisions over the short- to medium- term and were developed with the assistance of over 40 experts in geopolitics, climate policy, economics, finance, technology and consumer behaviour.

Credit: USS

USS Investment Management (USSIM) chief executive Simon Pilcher said: “This new report provides the foundations for a broad-ranging debate among investors, policy makers and academic experts on developing this practical approach to climate scenario analysis, with a view to embedding it into transition planning and financial decision-making. We hope this work represents the beginning of a much-needed shift in climate-related strategic decision making both within the investment industry and potentially beyond, which is a cause for cautious optimism.”

USSIM head of investment strategy and advice Mirko Cardinale said the research undertaken with the University of Exeter has been “extremely invaluable” in the development of a new approach to climate scenario analysis.

“We aim to lead in the development of this new approach that is less focused on precise estimation and more on understanding how real-world dynamics could play out in a complex world where climate risks cannot be looked at in isolation from political, economic, and technological factors. Moving forward, we intend to develop a long-term investment outlook informed by the scenarios and draw out investment implications for capital markets expectations, top down portfolio construction, and country/sector preferences.”

University of Exeter visiting fellow and lead author of the report Mark Cliffe commented: “Many organisations, not least in the investment community, are committed to playing their part in halving global greenhouse emissions by the end of the decade. It is disturbing that only in the most optimistic of our four scenarios does this look to be plausible.”

Global Association of Risk Professionals Risk Institute president Jo Paisley added: “We are already witnessing devastating physical impacts from a warming planet, which are only going to intensify over coming decades. Add transition risks to the mix, and the resulting risk landscape will be increasingly difficult to navigate.

“But given the significant uncertainties, we urgently need to consider a variety of scenario narratives. As this timely and thought-provoking paper makes clear, there is no time to lose.”

This article first appeared at Professional Pensions.

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