CFRF Guide 2023: Scenario anlaysis: Guide for Asset Managers [pdf]

The Climate Financial Risk Forum (CFRF) – comprised of representatives of the FCA (Financial Market Conduct Authority), the PRA (Prudential Regulation Authority), and from industry – has published a new guide, namely the CFRF Guide 2023: Scenario Analysis Guide for Asset Managers. The guide provides practical advice to asset managers as to
1. the roles and responsibilities within asset management firms dealing with or being responsible for climate related risks and their assessments;
2. the business processes that can be supported or even improved by using climate scenario analysis such as the allocation of assets, the alignment of portfolios with strategic goals of the firm or the portfolio manager, or the engagement with investee firms (stewardship) to foster the transition to net zero carbon emission; and
3. the steps involved in embedding climate scenario analysis in company processes, ranging from the selection of model providers, to the choice of an appropriate scenario, to the use of „adequate“, accurate data.
The guide also describes different scenario analysis methods (tools) offered by different agencies or firms such as the Network for Greening the Financial System. The guide thereby distinguishes between orderly, disorderly, and so-called „Hot house world“ scenarios which „model the effects of nationally determined contributions (NDCs) governments have pledged as part of the Paris Agreement“ or „the effects of a stasis in policy that is inconsistent with net zero objectives ever being met and for which financial risks primarily relate to physical climate impacts.“
The document further describes how climate change adaptation, that is measures taken by governments, entities, and individuals in response to climate change, may be taken into account in a scenario analysis. Such measures include, for instance, subsidies or monetary incentives to undertake climate change mitigating activities, or rules and laws to prohibit actions that may negatively affect climate change.
Finally, the document contains a large number of use cases for the use of climate scenario analysis, e.g. to make investment decisions or to inform strategic asset allocation.