NBIM highlights challenges of climate-risk analyses

Norges Bank Investment Management (NBIM) has highlighted the challenge of analysing the climate risk of its investments due to the limited availability of high-quality and relevant data.

In a letter to Norway’s Ministry of Finance, published yesterday, 28 November, NBIM explained its work on climate risk. It analysis of climate risks for the Government Pension Fund Global (GPFG) includes measuring carbon emissions of companies in its portfolios and performing scenario analyses. However, it said that calculations of carbon emissions only provides a “snapshot” and does not take into account industry structure, company strategy and other factors.,

“One general challenge facing analyses of climate risk is the limited availability of high-quality and relevant data. Numerous initiatives are under way to increase corporate disclosure and investor access to data. Examples include the EU’s Non-Financial Reporting Directive, the TCFD’s recommendations, and initiatives for reporting on environmental, social and governance issues such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and CDP (formerly the Carbon Disclosure Project),” the letter stated.

NBIM added that as an investor of more than 9,000 companies in more than 70 countries, it needs to be able to quantify and analyse the risks facing the fund. “There are numerous useful initiatives currently under way to improve and standardise company reporting, but there are still variations in the frequency and quality of corporate disclosure. We will continue to support initiatives to develop global standards for this reporting,” it said.

In addition, it also told the Norwegian government that it will continue to work on developing analytical tools for climate scenarios.

“We will expand and improve our internal analytical models for different climate outcomes by integrating more detailed company-specific data, such as financial data, emissions data, concrete targets for carbon reductions, and exposure to regional carbon-pricing mechanisms. In addition, we will look at how we can develop methods for analysing physical climate risks facing companies in the equity portfolio,” the letter read.

Despite its work on climate risk, NBIM highlighted that its management mandate for the fund is to seek the highest possible return.

“The mandate does not require the fund’s portfolio to adapt or contribute to the achievement of specific climate targets. The fund’s composition largely mirrors the benchmark index. The mandate does, however, state that a good long-term return is considered dependent on economically, environmentally and socially sustainable development and well-functioning, legitimate and efficient markets.

“With this in mind, the bank’s executive board has laid down principles for responsible investment management. These are based on internationally recognised principles and standards such as the UN Global Compact, the OECD’s Principles of Corporate Governance and the OECD’s Guidelines for Multinational Enterprises.”

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