Aviva develops climate Value at-Risk (VaR) model under IPCC scenarios

Climate VaR model developed with UNEP FI, Carbon Delta and Elseware

Aviva, the UK insurance and asset management giant, says it is calculating a climate Value-at-Risk model to help it assess climate risks and opportunities under various International Panel on Climate Change (IPCC) models over the next 15 years.

It said it is developing the measure, Climate VaR, in conjunction with the UN Environment Programme Finance Initiative (UNEP FI) investor pilot project, environmental data firm Carbon Delta and risk management consultants Elseware.
It said: “This measure enables the potential business impacts of future climate-related risks and opportunities to be assessed in each of the [four] IPCC scenarios and in aggregate.”

The initial analysis suggests:
1. Aviva is most exposed to the 4°C scenario where physical risk dominates, negatively impacting long-term investment returns on equities, corporate bonds, real estate, real estate loans and sovereign exposures. The aggressive mitigation 1.5°C scenario is the only scenario with potential upside.

2. When aggregated together to determine an overall impact of climate-related risks and opportunities across all scenarios, the plausible range is dominated by the results of the 3°C and 4°C scenarios, “reflecting that neither existing or planned policy actions are sufficiently ambitious to meet the Paris agreement goal”.

3. The 1.5°C scenario is dominated by transition risk, even after taking into account mitigating technology opportunities. In the 2°C scenario, transition and physical risks are more evenly balanced, whereas in the 3°C and 4°C scenarios physical risk dominates.

The information comes in Aviva’s new 2018 annual report, which includes sections on climate exposure and the Task Force on Climate-related Financial Disclosure (TCFD).

Aviva said: “The actions we are taking to reduce our investment exposure to carbon intensive sectors over time should lead to a reduction of the warming potential of our investment portfolio.”

It comes as the Bank of England is to stress-test insurers in the UK over climate change.

Aviva said the Carbon Delta analysis found that the “warming potential of our equity portfolio” at 3.4°C was 0.5°C below that of the FTSE 100. The “warming potential” of its corporate credit portfolio, at 3.2°C, was 0.2°C below the iBoxx GBP Liquid Corporate Large Cap Index.The analysis did not include investments in sovereign, real estate and infrastructure assets “where we have heavily invested in green assets”. It says it has £4.36bn (€5.1bn) of green assets, including £3.1bn in lower carbon infrastructure investments (mainly solar, wind and waste-to-heat biomass) and £1.26bn in green bonds.

Aviva’s climate work is being overseen by Group Chief Risk Officer Angela Darlington and Group General Counsel and Company Secretary Kirsty Cooper.

In a separate summary of climate disclosures, they write: “Aviva believes that unmitigated climate-related risks present a systemic threat to financial stability over the coming decades.

“Our responsibility as leaders is to ensure we are taking actions today to identify, measure, manage, monitor and report climate-related risks and opportunities.”

The annual report notes that Aviva’s climate-related risks and opportunities were presented to its board in December last year.

Speaking in a personal capacity at an event hosted by Financial News yesterday, Russ Bowdrey, Senior ALM Manager and TCFD Physical Risk Workstream Lead at Aviva, said he thought the TCFD should be made mandatory.

Writing on LinkedIn today, he said it the TCFD disclosures were “the result of a huge amount of work and collaboration both within the business and with our partners such as (but not limited to) Carbon Delta, FourTwentySeven, UNEP FI, South Pole, LSE, Elseware and our myriad data providers”.

He went on to say that “whilst we’re still learning about how to do this best, we’re aiming to be a beacon for others to follow. Particularly the companies we invest in”.

The Aviva report was launched on the same day as the International Energy Agency (IEA) said global energy demand rose by 2.3% in 2018 – and that fossil fuels met nearly 70% of the growth for the second year running although solar and wind generation grew at double-digit pace. But worldwide demand drove up coal use.

It meant that global energy-related CO2 emissions rose by 1.7% to 33 Gigatonnes (Gt) – driven by a “young fleet” of coal power plants in developing Asia.

IEA Executive Director Fatih Birol said “more urgent action is needed on all fronts — developing all clean energy solutions, curbing emissions, improving efficiency, and spurring investments and innovation, including in carbon capture, utilization and storage”.