Danish labour market pension fund giant ATP says it has launched its own internal climate scenario analysis project, saying some existing web-based scenario analysis tools lack transparency.
Scenario analysis was one of the key elements to come out of the Mark Carney-inspired Task Force on Climate-related Financial Disclosures (TCFD) and investors have been grappling with its implications.
“ATP fundamentally believes that scenario analyses can be useful for investors when assessing the robustness of their strategic plans,” it says in its new Responsibility report. The fund has 5.2m members and assets of more than DKK785bn (€105bn).
It says that it has chosen to launch its own project “to provide more insight into how climate scenario analysis can be used to inform investment decisions” – and admits that this is a “large and very complex task” that requires insight into climate research and climate modelling.
To do this requires two separate analytical processes, Hillerød-based ATP says.
Firstly a number of specific future scenarios must be defined, including population growth and climate policy, to determine the volume of greenhouse gas emissions.
Once the scenarios have been selected, greenhouse gas concentration data is needed as input for a climate model. The climate models are used to project future climate in a specific scenario, for example the sea level or temperature. There are “many assumptions, model limitations and uncertainties” associated with climate scenario analysis.
The second process meant that “ATP delved into the large volumes of data from many of the climate models on which the Climate Panel [the Intergovernmental Panel on Climate Change] has based its recent Assessment Report.” There is a large amount of detail on this topic contained in appendices.
It has applied the analysis to specific forest investments (it owns four forests in the US and one in Australia).
The investor is critical however of some of the tools that have become available recently, in particular the Paris Agreement Capital Transition Assessment (PACTA) developed by the 2 Degrees Investing Initiative (2dii) and supported by the Principles for Responsible Investment.“Unfortunately, it is ATP’s general experience that several web-based scenario analyses to some extent lack transparency in terms of the specific choice of methodology, which makes it difficult to determine how we can use the information in the ongoing portfolio management.” PACTA, which has its own section in the report, is a “concrete example” of this.
“ATP fundamentally believes that scenario analyses can be useful for investors when assessing their strategic plans”
ATP’s criticism ranges from PACTA’s focus on a small section of the total portfolio to its aggregation of data “which makes it difficult to assess the quality at company level”.
“The companies’ capabilities in relation to the green transformation are also excluded from the analysis. This means that it is not possible to identify the individual companies or to use the information as a basis for active ownership.”
Despite these and other criticisms, ATP is publishing the results of the PACTA tool on its website under ‘Climate’. The analysis is based on a manual extract of ATP’s portfolio at December 31 2018.
Jakob Thomä, Managing Director at the 2 Degrees Investing Initiative, responding to ATP’s comments, told RI: “The relevance of the model is a function of the research question. If ATP wants to analyse qualitative strategy questions (e.g. does the company have science-based targets, etc.) then indeed PACTA is not relevant.
“PACTA focuses on a specific research question around consistency of investment and production plans for key sectors with a range of scenarios over the next five years.” He went on to say: “At the end, we are not a commercial service provider so technical feedback is always welcome.”
Edward Baker, Senior Policy Advisor, Climate and Energy Transition at the PRI, agreed that PACTA is not designed to be a tool for company engagement, “but rather an alignment test of a portfolio”. Given investors’ budget constraints there was a need for “off-the-shelf” tools such as PACTA.