The Paris Agreement’s long-term temperature goal is to keep the rise in mean global temperature to well below 2°C above pre-industrial levels, and preferably limit the increase to 1.5°C. Does this mean the target is already breached? The Paris statement contains no formal definition defining how to measure global warming. A common measure that is an increase in temperature averaged over the globe over a 20 or even 30 year period. A long period is used to smooth out the natural climate variability such as impacts from El Nino events which were experienced last year. However, the long period approach could potentially result in a scenario whereby we do not know the level has been breached until more than a decade has passed.
What we do know is that we are closer than ever before to breaching this target and it is therefore imperative that our climate scenarios reflect these ongoing changes so that we understand the associated risks.
Early and late action scenarios within the Bank of England CBES are the realisation of different severities of transitional risks, whereas the no action scenario is the realisation of the physical risks. Therefore the CBES scenarios do not explore the possibility of the realisation of both physical and transitional risks within the same scenario. It is now looking plausible that it is too late for the early action scenario to come to fruition and too late for the late action scenario to not involve the realisation of some physical risks. Therefore it is becoming harder to imagine a future that does not involve both physical and transitional risks simultaneously.
At MIAC we have implemented a climate stress test framework within our assets and liability management system, Vision™ which incorporates a range of scenarios that go beyond CBES and the environment data to provide our partners with the ability to understand climate change risks within their portfolios.
Contact us to find out more about MIAC’s climate stress test approach.