Fund Solutions

LGIM Partners to Develop Climate Risk Solution

UK asset manager plans climate solution capability for institutional investors by Q1 2021.

Legal and General Investment Management (LGIM) and Baringa Partners, a consultancy specialising in climate and physical risk analysis, have developed a new framework to quantify the physical and transitional risks of climate change within investment portfolios.

The new tool, called Destination@Risk, leverages Baringa’s existing Climate Change Scenario Model. It will be used to help LGIM “robustly” quantify climate risks within investment portfolios using proprietary scenarios. By Q1 2021 a climate risk dashboard will be available to LGIM portfolio managers and analysts, which will be used to embed climate risk and alignment consistently across the firm’s global investment function.

LGIM will also launch a climate solution capability for institutional investors, also available from the Q1 2021, which will deploy the modelling tools developed, to measure the climate alignment of client assets, and to design and implement “Pathways to Paris” solutions.

Destination@Risk was first used to evaluate the climate risk and alignment of L&G’s own balance sheet assets, as detailed in the firm’s 2019 Task Force on Climate-related Financial Disclosures (TCFD) report.

The framework was initially used to analyse close to 2,000 companies across the globe, concluding that the majority of the companies were not aligned with Paris Climate Agreement objectives, raising concerns that some institutional portfolios may be aligned with temperature outcomes of more than three degrees. The evaluation confirmed that climate presented a first order material risk for long-term investors.

While no company assessed was immune to climate risks, a number of sectors faced significant risk concentration. “Climate Change is one of the biggest risks that investors are facing today, with US$10 trillion of capital invested worldwide in the globally listed energy sectors. This is amongst the most vulnerable sector in investor portfolios when it comes to the energy transition required to meet the Paris Climate agreement by 2050,” said Sonja Laud, Chief Investment Officer at LGIM.

“The scale of the risk and capital employed is significant. Yet, properly assessing the financial materiality of this climate risk is a significant challenge for investors today. We believe our framework and modelling capabilities will allow investors to properly assess climate risk in their portfolios and to make strategic asset allocation choices that will have a real impact on the type of energy system that is built,” Laud said.

 

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