Today Ortec Finance, a market-leading provider of technology and solutions for risk and return management, in partnership with Cambridge Econometrics, launches the first-ever Systemic Climate Risk Scenario Solution. The newly developed systemic climate-risk aware economic and financial outlooks show that a rapid shift to a low-carbon, climate-resilient economy is likely to generate more attractive returns for investors in the short term compared to a business-as-usual scenario.
For a fast-paced global energy transition to happen, it is assumed that companies, governments and consumers reduce their carbon emissions in an orderly manner so that average global warming is limited to 1.5°C. The quantified insights offered by Ortec Finance’s new systemic climate risk scenario solution highlight that a well-managed, sharp reduction of global carbon emissions holds large opportunities for investors. Drastically lowering emissions requires vast investments in new technologies, green infrastructure, energy efficiency and human capital development – all strong fundamental drivers of economic growth and investment return. Failing to transition in an orderly manner, on the other hand, implies forgone returns in the short run and may even lock investors into a situation of persistently lower growth. This is because the physical impacts of higher degrees of warming structurally undermine our planet’s ability to support human economic activity.
“Developing this solution really brought home the message that systemic climate change-related risks are material to strategic investment decision-making. We, therefore, consider systemic climate risk alongside all other economic and financial risk drivers. Traditional financial modelling, such as for ALM/SAA, can now be offered with climate risk-aware insights.” – Ton van Welie, CEO Ortec Finance
Ortec Finance’s research shows that it is key for investors to take the systemic nature of climate change-related risks and opportunities into account. Climate change will not only affect companies at an individual level, but will also fundamentally impact how the economy performs as a whole. Currently, most investors seem to focus on managing climate risk by engaging with, and potentially divesting from individual companies and other holdings. ‘Stock-picking’ is likely to be insufficient to manage the broader, knock-on effects on the economy since GDP, interest rate and inflation are seriously impacted by climate change.
The Ortec Finance systemic climate risk scenario solution is the first tool of its kind to integrate quantified systemic climate risks and opportunities associated with different global warming pathways into traditional multi-horizon real world scenarios sets. These systemic climate-risk aware scenarios sets enable investors to enhance their investment strategy through:
- Understanding systemic climate risk scenarios & exploring impacts on strategic asset allocation
- A strategic governance framework for climate action based on climate-aware ALM/SAA
- Climate-aware risk management: Assessing financial impact and materiality of climate change on different asset classes within portfolio
- Fulfilling forward-looking scenario-based analysis in line with disclosure recommendations, such as TCFD, UN PRI, EU Sustainable Finance Action Plan