Craig Mackenzie, Head of Strategic Asset Allocation at Aberdeen Standard Investments, has said the asset manager finds a lot of “garbage scenario modelling” on climate change and that portfolio temperature scores are a “waste of time”.
Mackenzie, who was speaking at RI Japan 2021, said many climate scenarios, such as those provided by the Network on Greening the Financial System (NGFS), gave an unrealistic guide for the next decade.
“We are increasingly helping our clients try to understand how climate risk will affect their portfolios in the near term. While some are interested in the next 50 years, the vast majority are interested in the next 5 to 10 years. That’s what will affect the prices of equity and credit portfolios.”
He said Aberdeen had been working with consultancy Planetrics to “model much more realistic scenarios” that try to capture the regional variation in climate policy.
“The standard NGFS scenario assumes a single global carbon price,” he said. “They assume that India will have the same carbon price and carbon policy as Europe. That’s not very realistic.”
“We have developed a regional strategy for our climate scenarios which allows Europe to move much faster than emerging economies and that gives you a much more realistic picture of climate risk.”
He said its work had found that the biggest risk in the near-term is transition risk, rather than physical climate risk, and the companies most at risk are coal-heavy utility companies in developed markets and global oil and gas companies.
“Those are the companies that have real market cap vulnerability,” he said. “Most other sectors have quite limited exposure, which is a reassuring finding in many ways for investors as they can focus their management of risk in two or three sectors rather than worrying about everything.”
He added that, before selecting Planetrics, Aberdeen assessed different climate scenario providers and found a lot of “garbage scenario modelling” that didn’t have a credible economic model and just worked on a carbon price.
Mackenzie also criticised the Taskforce for Climate-Related Financial Disclosures (TCFD) framework, saying Aberdeen used TCFD reports to engage companies and that the framework was a good source of questions, but wasn’t very useful for quantitative risk modeling.
“TCFD [reports] are PDFs, they are texts – it’s very hard to translate the contents of TCFD reports into usable formats in a consistent way,” he said, adding that company reports were not very credible, particularly in risky sectors.
“A lot of oil and gas companies are making net zero commitments in TCFD reports. At the moment we haven’t seen the shift in capital expenditure budgets that are consistent with a net-zero trajectory. We think a lot of it is talk and not action.
“It is a useful thing to have but we don’t think you should rely on it to do your modelling on risk.”
Also speaking about TCFD reporting on the panel, Seiichiro Uchi, Head of Self-index and ESG Business Development for Invesco Asset Management Japan, said that “many companies simply talked about their stories” and called for TCFD reporting to include more objective, science-based plans.
Dimitrios Papanastasiou, Head of Risk & Finance Solutions at Moody’s said TCFD reports were currently not entirely consistent across different markets and that some were “brief”. He added: “The number of data points and amount of information you need to have to properly ‘do’ TCFD is quite huge and I haven't seen many companies, in Asia at least, that are in a position to say the information they provide is robust.”
On the value of attributing temperature scores to investment portfolios, MacKenzie said Aberdeen had analysed a fund invested exclusively in climate solutions that has been assigned a temperature score of 2.8 degrees.
“I said it’s just invested in renewables – it’s a low carbon portfolio – and they [the score provider] said: ‘We based the assessment on the carbon intensity of the portfolio and solar panels manufacturers emit carbon so it is carbon intensive’. I said that misses the point.”
He said the methodologies were simplistic and the concept was “inherently problematic”. “We shouldn’t go in this direction, it’s a waste of time,” he concluded.
Uchi said that temperature scoring was an interesting idea but a lot of work needed to be done.