Climate change - of about 1°C of warming today relative to pre-industrial times - is already having disruptive effects on economies across the globe, through both its physical manifestations and the mitigation actions aimed at avoiding these. On the physical side, extreme weather events are increasing in frequency and intensity, resulting in severe repercussions for livelihoods, communities as well as, through impacts on operations, supply chains and customers, for companies. Without policy action, these effects will only intensify as the global mean temperature continues to increase (IPCC, 2018). On the transition side, policy and technology shifts have begun to affect the competitive positions of emissions-intensive companies relative to providers of low-carbon alternatives. The Paris Agreement—ratified by 185 Parties—aims to ensure that the increase in average temperatures above pre-industrial levels is kept to ‘well below’ 2°C by 2100 (UNFCCC, 2015).

Continued physical climate change and rapid policy action to limit it present investors with potentially unprecedented and uncertain financial impacts that they will need to manage.

The recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) outline the need for corporate and financial institutions to conduct forward-looking scenario-based assessments of these climate-related risks and opportunities. The recommendation to use scenario-based analysis to assess the long-term effects of climate change aims to ensure that corporate and financial institutions incorporate these effects into strategic decisions. For investors, as both users and issuers of climate-related disclosures, engagement with forward-looking climate-related risk analysis is doubly relevant. In holding large portfolios, most institutional investors face exposure to risk across sectors, geographies and financial instruments, while at the same time financing the development of the real economy. The longer time horizons of their asset and liability management, as well as their exposure to equity and unsecured debt, further highlight the importance of considering climate change in strategic decisions. However, the scope of investors’ exposure to climate change can be particularly difficult to assess given the size and diversification of their portfolios.

This report details the results of the UN Environment Programme Finance Initiative (UNEP FI) Investor Pilot on TCFD Adoption, a collaborative effort to explore, enhance and apply a methodology for assessing the impact of physical and transition risks and opportunities on the portfolios of institutional investors. The Investor Pilot Group comprises 20 institutional investors from across the globe. This report presents the methodology enhanced and used by the Investor Pilot Group in collaboration with the data analytics firm Carbon Delta. Outputs and evaluations of this methodology are intended as a first step towards understanding the potential for incorporating the TCFD recommendations on scenario-based risk assessment in investors’ financial disclosure. In addition, and in order to highlight the range of methodologies currently available to conduct these types of assessments, the report offers a ‘landscape review’ of other providers’ methodologies for climate-related scenario analysis.

The ultimate objective of the Investor Pilot including this report is two-fold: i) boost investor savviness and ii) support industry-wide harmonisation. The intention of the UNEP FI Investor Pilot is both to comprehensively guide individual investors on how to design and structure the application or use of scenario-analysis within their own institutions as well as to provide a basis from which the investment community can seek to achieve harmonisation and standardisation of investor disclosures so that over time these become comparable.