Legal & General Investment Management (LGIM) and Baringa Partners, a leading management consultancy and specialist in climate and physical risk analysis, have today revealed the co-development of a bespoke climate risk framework, Destination@Risk. The framework is powered by a range of tools, including Baringa’s Climate Change Scenario model. The model was adopted by Legal & General earlier this year after the two firms collaborated to build one of the market-leading climate change risk management frameworks available today.
1 Oct 2020
Destination@Risk allows the robust measurement of the climate risk embedded in investors’ portfolios and their climate alignment. By the first quarter of 2021 a climate risk dashboard will be available to portfolio managers and analysts within LGIM, enabling LGIM to embed climate risk and alignment in a consistent way throughout the entire global investment function. Destination@Risk has been developed over a period of 18 months in partnership with Baringa using its Climate Change Scenario model as a critical foundation, and was first used to evaluate the climate risk and alignment of L&G’s own balance sheet assets, as detailed in the firm’s 2019 Task Force on Climate-related Financial Disclosures (TCFD) report.
LGIM will also launch a climate solution capability for institutional investors, also available from the first quarter of 2021, which will deploy the modelling tools developed, to measure the climate alignment of client assets, and to design and implement Pathways to Paris” solutions.
The climate risk and alignment framework has initially been used to analyse around 2,000 companies globally, and has concluded that the majority of companies are not aligned with the Paris objectives, raising concerns that some institutional portfolios may be aligned with temperature outcomes of greater than three degrees. The modelling has also been used to assess both the transitional and physical risks in the companies analysed. No company assessed was immune to climate risks, but significant risk concentration was identified in a number of sectors. This evaluation has confirmed that climate presents a first order material risk for long term investors.
Sonja Laud, Chief Investment Officer (CIO), Legal and General Investment Management: "Climate Change is one of the biggest risks that investors are facing today, with $10 trillion of capital invested worldwide in the globally listed energy sectors. This is amongst the most vulnerable sector in investor portfolios when it comes to the energy transition required to meet the Paris Climate agreement by 2050.The scale of the risk and capital employed is significant. Yet, properly assessing the financial materiality of this climate risk is a significant challenge for investors today. We believe our framework and modelling capabilities will allow investors to properly assess climate risk in their portfolios and to make strategic asset allocation choices that will have a real impact on the type of energy system that is built."
Nick Stansbury, Head of Commodity Research, Legal and General Investment Management: "The world needs to redirect around $1 trillion dollars a year to the energy system of the future away from the fossil fuel dominant sector that exists today. For this capital to move, climate risks and opportunities need to be properly priced. That relies on investors developing robust, transparent and flexible risk management frameworks.It is therefore no surprise that our clients frequently ask us how they can assess the true impact of climate and transition risk on their investments and how they can align their portfolios with the Paris Climate agreement without sacrificing risk-adjusted returns. Working with Baringa Partners, a leading expert in this area, we have developed a market leading solution to this problem."
Colin Preston, Financial Services Sector and Climate Change lead, Baringa: "We are excited to have partnered with LGIM to develop their Destination@Risk solution. This has leveraged our leading Climate Change Scenario model, as well as our 20 years’ experience advising governments, the energy industry, and the financial services sector on climate change. Destination@Risk will give LGIM’s clients the ability to understand the climate risk and temperature alignment of individual assets, providing the critical foundation to enable investors to make investment decisions that can both reduce risk and improve the environmental impact of their portfolios. This will drive the reallocation of capital needed, and create the incentives for corporations to accelerate transition, to mitigate climate risk and move towards Paris."
Baringa Partners:
For more information or to arrange an interview please contact: climatechange@baringa.com. Baringa Partners is an independent business and technology consultancy. We are working globally with goverments, financial services clients and the energy industry, as well as across other sectors, to accelerate de-carbonisation, manage risks and adapt to climate change. We work with many of the largest banks, insurers and investors globally, including advising on many of the largest renewable energy projects that are already generating sufficient power for over 200 million homes.
Baringa launched in 2000 and now has over 700 members of staff and more than 70 partners across our five practice areas of Energy and Resources, Financial Services, Products and Services, and Government and Public Sector. These practices are supported by cross-sector teams focused on Customer and Digital; Finance, Risk and Compliance; People Excellence; Supply Chain and Procurement; Data, Analytics and AI; Intelligent Automation and Operations Excellence; and Technology Transformation. We operate globally and have offices in the UK, Germany, Australia, US, and the Middle East.
Baringa Partners has been voted as the leading management consulting firm for the third year in the Financial Times' UK Leading Management Consultants in the category Energy & Environment. We have been in the Top 10 for the last 10 years in the small, medium, as well as large category in the UK Best Workplaces™ list by Great Place to Work®. We are a Top 50 for Women employer, and are recognised by Best Employers for Race.
Baringa. Brighter Together.
Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with £1.2 trillion in total assets under management1 of which 40% is international. We have a unique and highly synergistic business model, which continues to drive strong returns. Legal & General provides powerful asset origination and management capabilities directly to clients, which also underpin our leading retirement and protection solutions. We are a leading international player in Pension Risk Transfer, in UK and US life insurance, and in UK workplace pensions and retirement income. Our purpose is to improve the lives of our customers and create value for our shareholders. Through inclusive capitalism, we are investing in long-term assets, such as real estate and infrastructure, that can help build a better society for the future.
1Data as at 31 December 2023.
LGIM is one of Europe’s largest asset managers and a major global investor, with total assets under management of £1.2 trillion1 ($1.5tn, €1.3tn, CHF 1.2tn). We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.
For more than 50 years, we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property, and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.
1Data as at 31 December 2023. Data combines assets under management by LGIM in the UK, LGIMA in the US and LGIM Asia in Hong Kong. Assets under management include securities and derivatives positions.