Sweden’s SEK333bn (€32bn) pension fund AP1 has teamed up with several institutional investors – including the €42bn Dutch industrial pension fund Pensioenfonds van de Metalektro (PME) – to participate in a “cutting-edge” research project to integrate climate change into “strategic level” investment decisions.
The pioneering project, which launched last week, is being coordinated by Ortec Finance, the Rotterdam-based firm known for its long-term asset liability modelling.
OPTrust, the C$20bn (€13bn) public pension fund for the Canadian state of Ontario, and the €19m corporate pension pot for Dutch technology giant Philips are also participating in the project along with Dutch insurer a.s.r.
The pilot aims to test and refine Ortec Finance’s newly created “climate savvy” scenarios, which aim to “shock” standard financial scenarios used to make “strategic level” investment decisions with climate considerations.
The portfolios of the five participating financial institutions – all of which are existing clients of Ortec Finance – will be run against the new climate primed scenarios to see how different “global warming pathways” affect optimal asset allocation.
“We are trying to quantify transition and physical climate related shocks” said Willemijn Verdegaal, Co-Head of Strategic Climate Solutions. “Basically, we shock the economic scenario sets that we already have with climate adjusted shocks to get a whole new set of economic scenarios.”
Verdegaal gave the example of how asset allocation under a business as usual scenario would differ from a one that is based upon a disorderly transition to a 1.5 °C climate goal – a scenario offered in the pilot.Data analytics firms Carbon Delta and Cambridge Econometrics are collaborators on the project, which is expected to run until the end of 2018.
Several academic institutions, including the London School of Economics’ Grantham Research Institute and VU Amsterdam’s Institute for Environmental Studies, will also be providing feedback on the pilot.
If successful, the pilot’s scenario sets will be made more widely available to investors by early 2019.
“Better knowledge of how climate change might affect risk and returns is crucial for our long-term performance” said AP1’s CIO Mikael Angberg. “Participating in this climate study will not only deepen our understanding but also be an important input in articulating our climate strategy.”
“The transition to a low carbon economy will becoming increasingly disruptive, and we have to be prepared as investors,” added Hugh O’Reilly, President & CEO, OPTrust.
“Climate change is much more complex than changing weather patterns, that’s why we’re taking action to develop the tools to translate and incorporate climate change into an investment context.”
The pilot is the first to be undertaken by Ortec Finance’s new Strategic Climate Solutions team, which was launched April 2018 and is co-headed by Verdegaal and Lisa Eichler.
Verdegaal is a former advisor for Responsible Investment & Governance at MN, the Dutch fiduciary manager, and Eichler was formerly Founding Partner at Terra Consulting, an advisory firm based between Frankfurt and Rotterdam, which advises public and private sector clients on environmental solutions.