How is our analysis different?

We’re very proud of our climate scenario analysis approach. That’s because, unlike those used by many fund managers, it’s not a standard ‘off-the-shelf’ solution.

Instead, we expand our view by including more realistic bespoke scenarios tailored to include more nuanced sectoral and regional assumptions.

These can also be updated to take into account credible changes in policy, technology and the structure of markets, as well as how companies are adapting to the energy transition.

Time for an update

We see further evidence of the continuing disparity between climate ambition and credible action. The urgency of the climate crisis has helped shape our first updates.

In the fourth instalment of our climate scenario analysis update, we look at the importance of the Asia Pacific region (APAC) and what this may mean for stock selection in the post-Covid world. 

climate scenario analysis update

Why APAC?

Half of the world’s ten largest carbon-emitting countries – China, India, Indonesia, Japan and South Korea – are located in Asia.

Many people expect it to be the world’s fastest growing region over the next three decades. As a result, Asia will be a major consumer of energy, as well as the most important battleground in the world’s fight to decarbonise energy production and use. 

Asian economies can be very diverse and are at different stages of development, with different carbon intensities and climate-policy goals. This means the region is unlikely to achieve net-zero emissions by 2050.

Market indices, and their constituent stocks, differ in ways that significantly affect their vulnerability to climate change. This is reflected by variations in long-term valuations.

Investors must understand these differences to seize climate-related investment opportunities and to avoid major risks.

Key takeaways

• Index-level climate vulnerabilities measured against our ‘most likely’ scenario are, on average, greater than for the global benchmark, the US and European indices;
• These vulnerabilities vary significantly across the region, with a pronounced difference between the most vulnerable (MSCI India) and the least (MSCI China). This is largely due to variations in regional sector weightings;
• MSCI China All Shares index is the least vulnerable of all the major APAC indices. That’s because many of the country’s most fossil-fuel intensive firms are unlisted state-owned enterprises;
• Valuation benefits in the utility sector seen elsewhere (because of electrification of power generation) are less obvious in APAC, where the power sector is expected to be less stringently policed and there are fewer large firms with significant renewables portfolios;
• Most divergence in climate change vulnerability, as elsewhere, occurs at the level of individual stocks. For example, the disparity within a single sector – energy – in our ‘most likely’ scenario can range from valuation ‘uplifts’ of 40% to impairments of 60%;
• On balance we think the region is unlikely to achieve net-zero emissions by 2050. But there will be significant differences in emissions pathways thanks to APAC economies’ different stages of economic development, carbon intensities and climate goals.

What this means for you

Our climate scenario analysis provides critical forward-looking insights into how APAC companies’ potential climate exposures differ from one another, as well as with their counterparts in other parts of the world.

We use these insights to identify climate-related investment risk and opportunity which informs:

• Our stock and portfolio construction decisions;
• Engagement activities;
• Development of climate funds and solutions.

Sector contributions to index level effects vary considerably across markets