USS and University of Exeter develop new climate scenarios to help tackle climate change

Universities Superannuation Scheme (USS) and the University of Exeter have released a new report calling for a radical and urgent shift in the climate scenarios used by investors, governments and businesses to address climate change.

At a time when more needs to be done to deliver net zero ambitions, current scenarios have significant limitations.

They often understate both the economic damage of climate change and the potential benefits of action, restricting their usefulness for investment decision-making.

The report, entitled: No Time To Lose – New Scenario Narratives for Action on Climate Change, presents four new climate scenarios that look at shorter-term and more realistic horizons to inform investment decision making.

Global warming is not a major uncertainty over the next few years.

But the tools investors and others are using to assess the financial risks we face are inadequate.

Current scenarios do not pay enough attention to shorter-term geopolitical risks and volatility in financial markets.

They use multi-decade horizons and smooth transitions that are not realistic representations of how economic and financial markets are likely to behave over the next 5-10 years.

To reach net zero targets by 2050, it is widely believed that emissions need to be halved by 2030.

Investors must therefore pay close attention to shorter-term risks and challenges even when assessing the long-term financial impacts of climate change.

The new climate scenarios, developed as part of a collaboration between USS and University of Exeter and with input from leading experts such as Mark Carney, Nicola Ranger, Nigel Topping and Caroline Cook, better reflect the real-world risks and opportunities that frame our investment decision-making over the short and medium term.

They switch the focus away from global average temperature pathways and towards the complex interplay between physical factors such as extreme weather events and human factors such as disruptions in geopolitics, economics, financial markets and technology.

The new scenarios range from optimistic, with politics and economics working in harmony to drive rapid decarbonisation, to pessimistic, where a toxic political climate compounded by dysfunctional markets frustrates progress.

They aim to present a richer, broader, and more realistic range of possible scenarios on which we can base our investment decisions.

Simon Pilcher, USSIM Chief Executive Officer, said: “This new report provides the foundations for a broad-ranging debate among investors, policy makers and academic experts on developing this practical approach to climate scenario analysis, with a view to embedding it into transition planning and financial decision-making.

“We hope this work represents the beginning of a much-needed shift in climate-related strategic decision making both within the investment industry and potentially beyond, which is a cause for cautious optimism.”

Mirko Cardinale, Head of Investment Strategy and Advice at USSIM, said: “This work with University of Exeter has been extremely valuable in representing an important milestone for the development of a new approach to climate scenario analysis.

“We aim to lead in the development of this new approach that is less focused on precise estimation and more on understanding how real-world dynamics could play out in a complex world where climate risks cannot be looked at in isolation from political, economic and technological factors.

“Moving forward, we intend to develop a long-term investment outlook informed by the scenarios and draw out investment implications for capital markets expectations, top-down portfolio construction and country/sector preferences.”

Mark Cliffe, University of Exeter visiting fellow and lead author, said: “Many organisations, not least in the investment community, are committed to playing their part in halving global greenhouse emissions by the end of the decade.

“It is disturbing that only in the most optimistic of our four scenarios does this look to be plausible. We have no time to lose.”

Mike Clark, University of Exeter visiting fellow, said:“We are increasingly aware of tipping points in earth and climate science.

“But they can occur more widely – and positively – across society, economies and in how organisations make strategic decisions.

“I hope this work will lead to a tipping point in the UK pensions sector’s approach to climate scenarios.

“This momentum needs to spread to other areas of finance, and beyond.”

Jo Paisley, President of GARP Risk Institute and contributor to the report, said: “We are already witnessing devastating physical impacts from a warming planet, which are only going to intensify over coming decades.

“Add transition risks to the mix, and the resulting risk landscape will be increasingly difficult to navigate.

“But given the significant uncertainties, we urgently need to consider a variety of scenario narratives.

“As this timely and thought-provoking paper makes clear, there is no time to lose.”