MANAGING CLIMATE CHANGE RISK AS INVESTMENT RISK

The General Account (GA) investment committee has been thinking about this long before we committed, in May, to the GA becoming net zero carbon by 2050.

With governments and regulators continuing to pursue their commitments to the Paris Agreement, we, as investors, need to stay ahead of the issue.

It is part of our fiduciary duty, so the internal discussions were focused less on the why and more on the how. Currently, climate change isn’t definitively priced in capital markets.

We are dealing with a complex and relatively unknown set of risks without much historical precedent.

Add to that the idea that managing for climate change is adding an additional constraint on the portfolio, and our task of sourcing the best risk-adjusted returns to meet our long-term investment objectives becomes even more demanding.

Our strategic, dynamic and tactical asset allocation process is built around allowing us to adapt and manage through different market environments over time.

Setting a longterm carbon target, aligned with the current science and the global Paris Agreement, with flexible interim targets will allow us to do the same.

As the world acts and reacts to climate change, we want to create resilient portfolios that deliver risk-adjusted returns over many different scenarios.

For the GA’s investment committee, this is a huge financial projections exercise.

It requires an enormous amount of data, much of which isn’t comparable across asset classes or in some cases doesn’t yet exist. Take sovereign bonds as an example.

There is no standardized way to measure the greenhouse gas emissions of a U.S. Treasury bond. Also, as governments and private entities transition away from carbon, the physical risks associated with climate change diminish.

Ultimately a chief benefit of making a net zero carbon commitment is that it rallies the organization and directs resources to solving these problems.

And as the quantity and quality of the data improve, markets can price climate risk more efficiently, allowing investors like us to make betterinformed decisions.

We also realize that we can’t completely reduce all of our financed emissions to zero.

So part of our task is to allocate capital to profitable enterprises that can provide negative emissions, such as carbon removal or sinks, to complement our main reduction efforts.

This could involve strategies such as investing in agriculture, timber or bioenergy with carbon capture and storage technology.

Additionally, we have to consider protecting against the physical effects of climate risk, especially if we consider the possibility of the world failing to meet the Paris Agreement.

It’s an unfortunate but possible scenario, and one of the many that a resilient, long-term portfolio should be positioned for.

This is a challenge of known and unknown variables.

For the GA, our solution is to try to stay ahead of the problem in order to properly meet our long-term investment goals in a rapidly changing environment.OUT