Using narrative climate scenarios to help asset owners better factor climate change into decisions

Climate scenario analysis can be a useful tool for asset owners, to help them consider the risks and opportunities presented by climate change.

To date, analysis focussed on quantitative projections has been of limited use in asset owner decision making processes. We used a narrative approach to look at the potential impacts of climate change on the real world, when and how these may play out, and what impact these changes in the environment might have on the global and local economy. This helps asset owners focus on the situations that are of most concern to them, understand the wide range of potential outcomes, how these outcomes could affect their assets, and consider the actions they can take to mitigate the risks and make the most of the opportunities.

The objective 

Our client – a large UK defined benefit pension scheme – wanted to consider alternative approaches to climate scenarios to help the trustee board better integrate climate risks into their decision-making processes. Previous analysis had included quantitative modelling of the funding position under different climate scenarios, which – whilst highlighting potential climate risks – had not led to significant impacts on decision-making processes.

The solution

LCP led a climate scenario workshop, joined by a climate scientist, to present narrative scenarios to the trustee board. The climate scientist had a specialism in tipping points, ie thresholds at which there is a sudden, often irreversible, shift in the state of the world. This narrative approach gave the board a much better insight into the potential physical risks of climate change, and the potential risks and opportunities of the low carbon transition. These narratives helped the trustees focus on the climate risks of most concern to them due to their impacts on their assets and the company covenant.

In particular, the trustees were provided with real life examples of the consequences of climate change, such as flooding, and how these could directly impact their assets or the company covenant (eg company properties no longer accessible by suppliers or customers, as well as the potential property damage).

The workshop also discussed some positive tipping points that have already occurred in the low carbon transition (for example the move to electric vehicles in Norway), highlighting the potential investment opportunities that could be available. This includes watching out for government initiatives that may drive the low carbon transition and create investment opportunities, and opportunities to invest in broader assets that can help mitigate the worst potential consequences of climate change.

Key insight 

Our approach changed the focus of the trustee board. The perception that a well-funded pension scheme can withstand almost any external risks was balanced with a focus on the significant downside scenarios that would be most detrimental to the pension scheme. The board better understood how these risks could come about and what the trustees could do to look out for these risks and better protect their scheme.

The outcome 

Using a narrative approach meant the trustees were able to consider climate scenarios that covered both the physical risks and transition risks, and translate these scenarios into real life situations and decisions that they are making on the trustee board (whilst also meeting their regulatory reporting requirements).

The trustees have since considered: 

• a range of investments to that could help protect the scheme from some of the risks;
• investments that could help to reduce the chance of the more severe outcomes of climate change impacting their pension scheme; and
• opportunities to collaborate with others to drive climate policy change that with the aim of creating a more stable investment environment for the scheme, allowing them to invest with confidence in a wider range of climate-considerate assets.