2024 SOA ImpACT Conference - Session 2N: Integrating Economic and Climate Scenarios 10.28.24 Recording

Climate change is an increasingly important and complex risk that has a potential impact on every step of the investment decision process. Results and insights from climate risk analysis are increasingly combined and integrated with traditional investment risk analysis to drive investment decision making. We will discuss how climate change risk represents radical uncertainty and the challenges this presents in integrating climate risk analysis and traditional investment risk analysis. The session will then explain and illustrate why deterministic, narrative-based, scenarios form a suitable basis for analyzing the potential impact of climate change on investment portfolios and strategies. A key challenge is that attaching probabilities to such climate scenarios is problematic while investment decision making requires attaching likelihoods to potential outcomes. We will explain a novel climate scenario benchmarking approach which ensures consistency between deterministic climate scenarios and the stochastic scenarios that traditionally support investors in making risk-return trade-offs. We then discuss a practical case study of integrating climate scenarios into asset-liability management for a Canadian defined-benefit pension plan. At the conclusion of this session, attendees will understand deterministic and stochastic approaches to integrating climate risk with economic scenarios and how these can be applied in investment management. Attendees will also understand the challenges in creating a realistic integration of climate and economic scenarios.