How can pension fund trustees get started on climate scenario analysis?

Mar 31, 2022 | Member Blog, News

Graham Hook
Graham Hook, Head of UK Government Relations and Public Policy, Invesco Asset Management Limited

What is the challenge for trustees?

From 1 October this year, the number of occupational pension schemes required to publish a Task Force on Climate-Related Financial Disclosures report under the Climate Change Governance and Reporting Regulations is set to more than treble to over 350.[i] For schemes falling within scope, this may be the first time trustees have faced the task of assessing the potential impact of climate change on their scheme’s strategy, assets and liabilities.

How to get started with scenario analysis?

Approaching climate scenario analysis may seem a daunting prospect. But it’s important to remember that scenario analysis itself is a long-established planning tool. At its most basic, it’s about answering the question: “What if…?” What would be the impact if the global average temperature increased by 1.5 or 2°C? And the results can help trustees mitigate potential portfolio risks and take advantage of future opportunities in the transition to a low-carbon economy.

However, it’s important to have a clear up-front view of some of the major challenges and decisions involved. Is the intended output qualitative or quantitative? (UK Department for Work and Pensions guidance permits both initially). For which of the portfolio’s assets is reliable data available and where are the major gaps? Consequently, which asset classes may need to be excluded from the analysis? What are the most appropriate short-, medium- and long-term time horizons for the scheme over which to conduct scenario analysis?

What tools are available?

While the range of challenges and decisions is wide, there are many tools available to assist trustees through the process. Indeed, as well as drawing on advice from asset managers and investment consultants, the use of third-party providers to conduct analysis is permitted by the DWP guidance.  While there is a growing number of methodologies available, they fall broadly into three categories:

  • Cost impairment / impairment value – which isolates climate transition and physical risk factors to map their respective impacts on portfolios;
  • Climate value-at-risk – which indicates the potential impact of climate change on a security’s market value; and
  • Exposure Gap (PACTA[ii]) – which indicates the degree to which a portfolio’s investment plans align with sectoral decarbonisation scenarios.

As well as conducting the analysis, third-party providers may help trustees to apply “off the shelf” climate scenarios, or to develop bespoke ones. The industry-led Climate Financial Risk Forum’s Handbook is a useful source of guidance, as is the non-statutory advice published by the Pensions Climate Risk Industry Group. Whatever the sources of external assistance, it is crucial that trustees themselves understand the process and assumptions underpinning the climate scenarios and methodologies used, so that they can accurately interpret the results.

An iterative journey

Invesco’s experience of scenario analysis, as disclosed in our annual Climate Change Report, is that it’s a journey – an iterative process which will increase in sophistication over time as experience grows.  The most important thing is to start the journey as soon as possible, allowing trustees adequate time to plan and execute their journey to best effect.

 Click here to read Invesco’s full White Paper on climate scenario analysis for pension funds


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Important information

This is marketing material and not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.

[i] Consultation Stage Impact Assessment on Climate Change Risk – Governance and Disclosure (TCFD) Proposals (

[ii] Paris Agreement Capital Transition Assessment methodology.

The asset managers that make up the DCIF are committed to promoting investment best practice within DC pension schemes.