OPTrust Climate-Savvy Project Delivers New Insights for Pension Fund Study explores new approach to map potential climate impacts on future risk and returnPosted: February 26, 2019
Toronto, February 26, 2019 – OPTrust today released the results of its climate-savvy asset liability management/strategic asset allocation (ALM/SAA) project in partnership with Ortec Finance. The project marks another important step for OPTrust’s Climate Change Action Plan to ensure the portfolio remains resilient and agile in meeting the challenges of climate change.
The ALM/SAA project is one of the first efforts of its kind to integrate quantified physical and transition risks and opportunities associated with climate change into traditional multi-horizon, real-world scenario sets that drive strategic investment decision-making.
James C. Davis, Chief Investment Officer of OPTrust said, “Taking action on climate change and considering the financial implications is in the best interests of our members at OPTrust. In integrating climate risk into our portfolio construction framework, we continue to explore and develop various climate change scenarios and analyze the impact on the entire portfolio. We are pleased with the results of the pilot project as it helps provide a current state assessment of climate risks to our fund.”
Key Findings from the Report
- Top-down, macro-economic and systemic climate risk perspective delivers new insights. The pilot has established that it is crucial for investors to consider the macro-economic and systemic implications of different global warming pathways (top-down approach).
- For a globally diversified investor, a transition to stay under 1.5°C warming, even a severely disorderly one, is preferable over a 4+°C scenario. However, there are material differences across regions; largely determined by the relative energy efficiency of the economy and dependence on carbon intensive production and exports.
- At a global level, a steep economic transition to limit warming to 1.5°C may entail significant opportunities for economic growth, perhaps even above current market expectations – the infrastructure investments required, research & development and employment generated are strong drivers of growth and competitiveness. The more orderly the transition, the more pronounced these economic and investment opportunities become.
- The time to act is now – even if physical climate-related risks may only become financially material on a longer time horizon. The expectation that physical climate-related financial risks are likely to only materially manifest as of mid-century is no reason to be complacent as an investor today.
- If action fails today and the transition to a low-carbon, climate-resilient economy is not completed by mid-century, our economies will be locked into a higher global warming pathway where the global economy is likely to increasingly and structurally slow down. The negative impacts of a 4+°C pathway take over the impacts of a disorderly transition to 1.5°C around 2030-2080, depending on the country.
- The climate-savvy ALM analysis permits investors to fulfill increasingly stringent disclosure requirements and upcoming regulatory compliance.
- The project supports strong climate action through informed strategic choices: Gaining insights to enable portfolio optimization for a chosen global warming pathway (that matches investment beliefs/goals/targets), while at the same time ensuring the portfolio is robust for other global warming pathways.
- There is no silver bullet when managing climate-related financial risks. Each step in the investment process requires a different forward-looking scenario-based approach.
For more details, download the full report.
With net assets of over $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with over 92,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.
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