BCI assesses potential expected returns under multiple climate scenarios using a model based on Mercer’s Climate Change Risk Assessment Research Package.
Outside of the three-degree global warming scenario where impacts were not expected to be material on an aggregate total fund level, we evaluate our clients’ potential long-term return impacts under both a:
- Two-degree global warming scenario, where the transition to a lower carbon economy occurs faster than expected and creates elevated levels of transition risk for certain assets, while resulting in less risk of the physical impacts brought on by climate change;
- Four-degree global warming scenario, where climate action policies, technological advancements, and sentiment are largely insufficient, resulting in less transition risk but experiencing significant increases in physical impacts on certain assets.
Using client long-term strategic asset allocation targets, we found that the two- and four-degree climate scenarios would create an expected drag of 0.14 per cent and 0.16 per cent in average annual returns respectively over the 15-year forecast horizon, relative to the base case scenario.
Beneath the total fund aggregate impacts, asset class performance varies significantly depending on which scenario unfolds. In the four-degree scenario, real assets are more likely to suffer from the rising risk of physical impacts. In contrast, in a two-degree scenario, the performance of developed market public equities is expected to be impacted as companies exposed to traditional energy assets, such as oil, would likely experience valuation adjustment.