Castle Debates NGO / FINANCIAL PERSPECTIVE 2 Forward Lookong - PowerPoint PPT Presentation

Castle Debates NGO / FINANCIAL PERSPECTIVE

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Forward Lookong Disclosure shines a light on risk Mark Carney, Governor of the Bank of England and chair of the Financial Stability Board: The abrupt transition to a low- carbon future is ‘a financial stability risk’ There is great need to: ✓ Translate the impact of clean technology & climate policy on company assets on a quantitative & comparable basis ✓ Improve disclosure of the assumptions underpinning company forecasts to allow investors to scrutinize them on a forward looking quantitative basis ✓ Critically a reference scenario (pathway) must be set against which shareholders can judge a companies progress towards Paris Compliance ✓ The PRA’s reviews of current practice in the banking & insurance sectors highlights that, while firms are enhancing their approaches to managing the financial risks from climate change, few firms are taking a strategic approach that considers how actions today affect 3 future financial risks.

What scenario do glo lobal in investors expect? (P (PRI I in in Person 2018)

Why? hy? T The he Wor orld is n ld is not on tr ot on trac ack f k for w or well ell belo below w 2°C C #PRIinPerson

Kodak Moment Illustrates Financial Impact of Marginal Change 7

Far-reaching changes can occur faster than expected Renewables Racoon IEA solar PV capacity forecasts against actual N.B. The IEA has now revised its medium-term forecast for wind & solar up by 13% since 2015 Source: Carbon Tracker report: Lost in Transition (2015)

Forward Looking Disclosure shines a light on future risk in a transition The purpose of the climate stress test is not 1 to predict how climate targets will be met But to offer an assessment of the 2 magnitude of impact if they are “Stress testing, built off better disclosure and a price corridor, could act as a time machine, shining a light not just on today’s risks, but on those And translate the impacts in a 3 that may otherwise lurk in the darkness for years to comparable and quantitative way come.” - Gov. Mark Carney, Bank of England Sept. 29, 2015 9

UK Prudential Regulation Authority (P (PRA) Proposed Cli limate Im Impact Scenarios Beyond the ‘usual’ market shock scenarios, the PRA is proposing ( on a best effort basis): • Scenario A: ‘2022 Minsky moment’: Sudden and disorderly transition to temp increase by +2°C by 2100 • Scenario B: Long-term orderly transition to +2°C by 2100, with transition to greenhouse gas-neutrality by 2050 • Scenario C: ‘Hot house’ scenario : +5°C by 2100 assuming no transition, with maximised physical risk • In these scenarios, physical risks are assumed to impact general insurers liabilities, as can be reasonably expected. • What is really interesting is the parallel focus on transition risks, which will impact assets of all insurers (Life & General).

In Investor leadership areas to consider • Governance fit for purpose. • Manage portfolio risk including managing stranded assets. Reduce high carbon exposure and increase low carbon investment opportunities. • Engage key service providers engage and build capacity with advisors and service firms. • Engage companies act now to reduce impact. Prepare them to deliver efficient outcomes. • Engage policymakers reinforce need for action and certainty. Engage regulators to establish key changes to enable action.