The UK’s financial markets supervisor will this autumn launch a testing scheme for innovative climate scenario tools, as pension fund trustees have separately been urged to strengthen how they use scenario analysis.
The first providers have already been welcomed into the Financial Conduct Authority’s (FCA) new regulatory sandbox on climate scenarios, which aims to bring together industry representatives with a view to improving how climate risks are assessed and applied in practice by market participants.
TREX, a University of Exeter spin-out that recently partnered with the Universities Superannuation Scheme on new narrative climate scenarios for “enhanced investment resilience”, is already on board the FCA’s new initiative, according to an update this week from Alicia Kedzierski, the watchdog’s head of sustainable finance department.
The FCA’s initiative is part of broader efforts to restore the credibility of mainstream climate scenario analysis, which has been criticised for reasons including unrealistic pathways and failing to offer probabilities.
According to Accounting for Sustainability, a non-profit organisation, there is also room for improvement in how pension fund chairs and trustees use scenario analysis at board level.
In a guide published today, A4S set out ways in which boards could take greater ownership of scenario analysis, “moving it from a primarily analytical exercise to a practical input into strategic decision-making”.
It suggested this could be done by being clearer about climate scenario analysis’s purpose, challenging underlying assumptions, and combining quantitative outputs with narrative-led approaches that explicitly explore uncertainty, non-linear change and hard-to-model risks.
The guide was developed by A4S alongside its Asset Owners Network, an invitation-only forum for pension fund chairs to share practical approaches to integrating sustainability into long-term strategic and investment decision-making.
The FCA’s climate scenario testing scheme is aimed at climate scenario firms or specialists working on approaches including plausible low-probability, high-impact risks; tipping points, second-order and compounding effects, or subnational and sector-specific impacts, reverse stress testing.
