Climate change as a financial risk to the fund

Abstract

Climate risk is already affecting the markets in which the fund is invested. The changes in the climate system are becoming more intense, widespread, and frequent. The long-term economic implications of climate change could be significant. Norges Bank Investment Management (NBIM) addresses risk within a general framework set by the Ministry of Finance. This paper considers climate change as a financial risk to the fund and assesses the results of two approaches to measuring climate risk in investment portfolios – carbon footprint analysis and climate scenario analysis. Carbon footprint analysis has provided us with valuable insights into changes in the carbon-intensity of our equity investments and corresponding benchmark index. Since 2013, the carbon-intensity of the equity portfolio has decreased by 50 percent. Climate scenario analysis can illustrate how emissions trajectories and corresponding financial outcomes effect the portfolio over time. The robustness of these approaches is challenged by incomplete data and methodological limitations. A carbon footprint is based on historical data that may have limited relevance to future risk, while climate scenarios designed to test the sensitivity of investment portfolios typically exclude second- and third-order effects of climate hazards and climate regulation that are difficult to quantify. Overall, climate change is a financial risk to the fund. We will continue to engage with researchers and practitioners and support the further development of approaches to measuring climate risk in the fund.