Carbon emission monitoring and climate stress testing

As the carbon footprint of investments (measured in tonnes CO2 per million euros company turnover) has been mapped for a larger part of the portfolio, more insight has been gained into possible transition risks. One of the insights is that the carbon intensity of the loan portfolio is significantly higher than for the equity portfolio. 

While the carbon emission monitoring and carbon tax stress testing is a good first approach, it is too limited in scope to give a complete picture of climate risk. Carbon tax stress testing only takes transition risk into account and cannot adequately differentiate between companies that are part of the solution to climate change, companies that are potential stranded assets, and everything in between. Also, the impact of a possible carbon tax remains very difficult to predict. There are many indirect effects that are difficult to include in the analysis. Questions we consider include: how quickly can businesses adapt? How much of a potential carbon tax is already embedded into prices? Will the carbon tax be introduced globally or locally? How would the carbon tax affect the business of key supply chain partners both directly and indirectly? 

In 2021, we performed further research on climate risk stress testing and continued our collaboration on this topic with the Pensioenfederatie (in English: Dutch Pension Federation), the Dutch umbrella representative entity of almost all Dutch pension funds in 2021. A good climate risk stress tests should be forward looking and takes both transition and physical climate risk into account. We continue to research this in cooperation with others. We are gathering information regarding new forward looking long-horizon climate risk stress tests that take both transition and physical risk into account. We completed our research for a new climate risk stress testing tool, thereby greatly enhancing our capabilities to accurately monitor climate risk in the investment portfolios. In 2022, we will start with the implementation of a new climate risk stress testing tool that will greatly expand our ESG and climate risk monitoring capabilities and thereby putting sustainability risk on a comparable level with traditional financial risks. Additionally, we continue developing the aforementioned dashboard by, for example, expanding the asset class scope to government debt or enriching the amount of ESG / Climate / Reputation data available.

In 2021, we developed a framework for the private markets portfolios in which we estimate the gross and net risk exposure towards climate change. This includes - to the extent we are able to assess - both physical and transition risks on the basis of seven indicators. We are currently in the process of rolling out this framework. Below are a number of examples of how the investment teams in 2021 integrated climate risks in their day-to-day investment activities.