Hosted by PRI and Carbon Tracker on Tuesday 24th June during London Climate Action Week
Introduction
All regions of the world are now affected by the physical impacts of climate change, in multiple ways. Recent data and research shows that more than a third of all sectors are highly exposed to physical climate impacts - such as drought, extreme heat and water stress – with many corporates inheriting this direct or indirect exposure through their value chains, which has knock on effects for the financial institutions that invest in and lend to them1.
Global investment consultants play an important role advising clients on climate risk, using tools such as scenario analysis amongst others to identify climate-related risks and opportunities that might affect their schemes and investments over different time horizons.
During London Climate Action Week, PRI and Carbon Tracker convened a roundtable with global investment consultants to explore their use of climate scenario modelling when giving advice to investors on their investment decisions. The discussion focused on how climate scenario analysis can move beyond regulatory compliance exercise (e.g. TCFD) to being a useful tool for advising clients on how to manage systemic climate risk. The session featured presentations from Carbon Tracker, the Institute and Faculty of Actuaries (IFoA) and investment consultants. This was followed by an engaging discussion on the practical challenges consultants face when advising clients about climate risk.
Key insights
Limitations and evolution of climate scenario modelling
Some of the key concerns raised by the IFoA were about the underestimation of physical risks – notably the exclusion of tipping points – leading to the significant underpricing of the financial losses associated with climate change2. For example, scientists note that the AMOC weather system does not need to shut down entirely to disrupt crop production, having adverse societal and economic repercussions. Accordingly, investors should be encouraged to adopt a precautionary principal approach to prepare for tail risks and worst-case scenarios as part of their risk assessments.
Owing to a lack of understanding of the flaws associated with climate scenario analysis as a risk assessment tool, it is difficult for investors to interpret the outputs of climate models – especially the economic damages associated with different temperature pathways in a decision useful manner. There is a growing gap between modelled outcomes and observed climate impacts, such as extreme weather and biodiversity loss.
Carbon Tracker is collaborating with the University of Exeter and Finance Watch on a project that aims to develop new damage functions, based on surveying climate and social scientists from around the world about their views on the estimations of economic damages associated with different temperature thresholds. This aims to better reflect non-linear risks and provide a more realistic basis for financial modelling.
Practical application and case studies
The session showcased case studies from two investment consultants on how they are applying and using scenario analysis.
The first example from an investment consultant used NGFS scenarios with MSCI data and the ‘hot house world’ instead of the ‘fragmented world’ scenario to stress test portfolios. Their approach emphasised resilience over prediction and alignment with net zero commitments. They also showed that certain asset classes were impacted more than others.
The second example from an investment consultant integrates the IEA and NGFS scenarios, which are updated every two years to incorporate new data and methodological improvements. They complement top-down analysis with bottom-up materiality assessments, focusing on physical risks and nature-related exposures.
Both examples highlighted the importance of using scenario analysis as a tool for engagement, education, and strategic alignment rather than as a forecasting tool. While adaptation is important, clients will also need to think about resilience.
Engaging with clients
Some investment consultants noted a rise in the number of clients asking about climate scenario modelling, especially the insurers. Whereas some consultants said that there is a general rise in clients asking about how exposed they are at managing climate risks overall.
In some cases, investment consultants found that scenario analysis has become a TCFD box ticking exercise instead of using it to inform investment decisions. Some consultants have either withdrawn the models from client facing use or have discontinued publishing any quantitative data on scenario analysis as they found the results to be misleading for their clients in relation to how they use scenario analysis to understand their climate risk exposure.
Supporting clients by drilling down into specific sectors to help inform their engagement and stewardship efforts, as well as inform exclusion policies.
Engaging with policymakers
One of the emerging themes was the need to move beyond the “consultant bubble” and engage more effectively with policymakers, regulators, and the public. The participants were also interested in engaging with the insurance industry to better understand how they model climate related risk/model extreme weather events.
One suggestion was to align efforts across actuarial bodies, asset owners, and government departments, particularly finance ministries to embed climate risk into financial policy and regulation.
Conclusion
The session underscored that while climate scenario modelling has advanced, it remains constrained by methodological gaps and limited uptake. To unlock its full potential, investment consultants should:
- push for more realistic and science-aligned models,
- use scenario analysis as a starting point for broader strategic conversations,
- consider narrative scenarios that present information in a more relatable and memorable way to improve clients’ understanding of climate risk and conceptualise disruptive future outcomes that are difficult to model (e.g. insurance sector collapse and economy wide impacts) and,
- collaborate across sectors to influence policy and reshape financial norms.
It was also discussed whether it would be helpful to engage with the insurance sector and conduct sensitivity analysis.
The group also called for a shift from compliance-driven modelling to proactive, systemic risk management, informed by experience, and driven by a shared commitment to a sustainable future.
About Carbon Tracker
Carbon Tracker’s engagements with pension funds and other institutional investors have identified that physical risk is climbing up the agenda for investors, as they are increasingly aware that they cannot diversify away from systemic climate risks within investment portfolios.
Carbon Tracker’s research and engagement work – focusing on the climate risk advice that UK pension funds are receiving – continues to reveal advice recommending that investors should only decarbonise at the pace of society; leaving clients in a difficult situation when considering whether to act unilaterally and do more when others are not.
About NZICI
The Net Zero Investment Consultants Initiative (NZICI) is a commitment from some of the world’s most prominent investment consultants to align their operations and advisory services with the 1.5 degree emissions trajectory outlined in the Paris Agreement. PRI provides secretariat to NZICI. PRI has been engaging with NZICI, Carbon Tracker and other PRI signatories on this topic for the past few years.
