Climate change has been identified as one of 4 critical long-term risks and opportunities that may have a material adverse impact or give rise to significant opportunities for the Scheme. As part of our analysis of climate risks we include all aspects, including transition risks and physical risks, as well as issues such as climate change data and disclosure risks which could result in less informed decision making.
Historically we viewed climate related risks as a less imminent, longer term risk. However, recently climate change has resulted in clear valuation implications, including permanent loss of value (flooding, wildfires, rising sea levels) for assets highlighting it as an influencing factor across all time-horizons. This has led to the decision to establish a top-down Scheme-wide goal on climate change.
Our strategy to address climate change is part of the Scheme’s broader responsible investment strategy which integrates ESG factors across 3 key phases of our approach: (i.) investment strategy, (ii.) manager selection, monitoring and mandate design, and (iii.) active stewardship and engagement. As with managing anything, having the ability to measure is vital. Across the 3 phases of our approach measuring the impact of climate change is important: whether that’s scenario analysis of different temperature outcomes on our assets as part of investment strategy, the carbon footprint of manager mandates or how engagement is effecting change in company emissions.
In the short to medium term our work and analysis suggests transition risks are more significant to our portfolio. As we move out longer term, physical risks become more impactful. In the case of the latter, the range of potential outcomes is very wide, albeit for certain asset classes and sectors the long-term return impacts are less disperse. This is important for a mature Scheme like BTPS that is increasingly seeking to reduce the range of portfolio outcomes to meet our objectives. In general climate change (transition and physical risks) exposure needs to be carefully monitored and managed for us to achieve our funding, fiduciary and sustainability goals.
There are numerous examples of how we have factored in climate change to our investment decision making, for example:
Investment strategy – to date we have not invested in insurance linked strategies, in part because we didn’t feel the risks of climate change were adequately reflected in underwriting activity. A more positive example would be the adoption of climate targets for our UK real estate portfolio across a range of factors including emissions, waste & recycling and heating, to ensure properties are resilient to climate risks.
Manager mandates – In 2019 we exited a value orientated equity strategy, in part because we didn’t feel the strategy adequately either exploited climate opportunities or mitigated the risks. We reallocated into two actively managed equity mandates where the managers clearly incorporate climate change factors (and wider ESG considerations) into their bottom-up analysis, and company engagements.
Stewardship – a focus of stewardship activity and emphasis has been on climate related issues. Examples detailed in other sections of this submission.