Integrating Climate Scenario Analysis into the Investment Process

Integrating Climate Scenario Analysis into the Investment Process

Climate change poses significant risks to the global economy. However, it is inherently difficult to accurately predict how climate change could impact an investment portfolio for three primary reasons:

1. Investment horizons are typically much shorter than climate impact timescales.
2. Climate impacts are highly uncertain, and climate science is constantly evolving.
3. It is difficult to relate non-financial factors such as greenhouse gas emissions directly to financial outcomes.

To address these challenges, investors are increasingly turning to quantitative climate scenario analysis, which can help explore the portfolio-level impacts of transition risks relating to decarbonization and physical risks such as hurricanes, extreme heat, and wildfires.

In this report, the Institute for Sustainable Investing outlines how investors can integrate climate scenario analysis into the investment process, including key considerations, outputs, and use cases. We also offer a case study leveraging Morgan Stanley’s in-house climate scenario analysis capabilities to explore the implications of two potential pathways for moving towards net-zero by 2050 with varying levels of available carbon capture and storage (CCS) technology.

Source:

https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/InstituteforSustainableInvesting-IntegratingClimateScenarioAnalysisintotheInvestmentProcess.pdf