Four new scenarios that could act as a ‘tipping point’ in pension industry’s approach to climate change.
The Universities Superannuation Scheme (USS) has teamed up with the University of Exeter to publish research which presents four new climate scenarios that look at shorter-term and realistic horizons to inform investment decision making.
A report has presented four new scenarios that could act as a ‘tipping point’ in the pensions industry’s approach to climate change.
The 43-page report entitled ‘No Time To Lose – New Scenario Narratives for Action on Climate Change’, refocuses methodologies to better identify tipping points, including more short-term focus and integration of macro factors.
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What are the four climate change scenarios?
The report sets out a matrix of scenarios involving four different combinations of high or low policy activism and high or low market dynamism. The first and most optimistic scenario entitled ‘Roaring 20s’, has both drivers working in harmony, resulting in rapid decarbonisation. The last and most pessimistic scenario labelled ‘Meltdown’ involves a toxic political climate that is compounded by dysfunctional markets, which frustrates progress.
In between are two scenarios including the second scenario entitled ‘Green Phoenix’ which is market-driven, while policy lags and the third scenario labelled ‘Boom and Bust’ is when policy steps up after fossil fuel surge bursts.
Altogether, compared with commonly used reference scenarios, this new set aims to present a more realistic range of possible developments on which decision- makers can assess risks and create better outcomes.
Mike Clark, visiting fellow University of Exeter, said he hopes this research will lead to a ‘tipping point’ in the UK pensions sector’s approach to climate scenarios.
He 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.”
Simon Pilcher, chief executive officer at USS Investment Management Limited (USSIM), said: “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.”
Climate change and the pensions industry
In July there were calls for the Taskforce for Climate-related Financial Disclosures (TCFD) reports to be beefed up and made more relevant.
A report by the Defined Contribution Investment Forum (DCIF) analysed 14 DC master trust Taskforce for Climate-related Financial Disclosures (TCFD) reports; master trusts have been required to publish TCFD reports since 2022 to report on their progress in managing climate risk on behalf of their millions of members.
The report, which is the second in a two-part DCIF series, found that making a comparison between the reports in terms of which master trust was doing better or worse at managing climate risk was "almost impossible".