OUT OF THE FOG
RESULTS OF THE 2°C SCENARIO ANALYSIS
The assessment presented in this report seeks to answer two related questions:
1. Are the financial portfolios – specifically the portfolios invested in equity and corporate bonds markets – of Swiss pension funds and insurance companies consistent with the 2°C climate goal?
2. If a disruptive transition should occur, what is the scale of exposure (in terms of share in the portfolio) of Swiss pension funds and insurance companies to potential financial risks associated with the transition to a low-carbon economy?
Collectively, the financial flows underlying the corporate bonds and listed equity portfolios of Swiss pension funds are currently on a 6°C pathway, with the exception of fossil fuels where – at least for now – investment in expanding production has been reduced due to macroeconomic factors.
The companies in these portfolios are currently investing to increase production across all high-carbon technologies analysed for this project, notably coal power, gas power, oil production, gas production, and petrol / diesel vehicles (referred to here as internal combustion engine vehicles or ICEs). At the same time, investment in low-carbon alternatives (renewable power, electric power, hybrid vehicles) is lacking. Similarly, further investment is required in decarbonizing other transport (aviation, shipping) and industry (cement, steel).
While there is a collective gap, investment trends have been evolving, suggesting that alignment of financial markets with the 2°C climate goal is still feasible.
Renewable energy investment across most geographies has been increasing in the past years. A moderate increase of investment trends in the analysed portfolios, coupled with renewable energy investment from other actors (e.g. households) will bring financial markets significantly closer to the 2°C goal. Similarly, while in absolute terms the gap for electric vehicles for example is significant, this gap has already started to close when compared to 2015 projections. If oil & gas companies continue to constrain their capital expenditure, production will drop by the early 2020s, consistent with 2°C scenario and the objectives defined by international actors such as Mission 2020.
Moreover, there are significant differences across both asset classes and the portfolios of individual pension funds and insurances.
Portfolios differ both in terms of their aggregate exposure and misalignment to the 2°C benchmark as well as with regard to the capital transition i.e. changes in production and investment plans required under the Paris Agreement. Some portfolios may already be consistent with the Paris Agreement, whereas others are lacking for some technologies and sectors. The share of renewables in planned investment ranges from 3% to 91%, for electric and hybrid vehicles the range is 3% to 100%.
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