Accounting for Sustainability has published a new guide on how to use climate scenarios. The organisation is calling on pension trustees to strengthen how they use climate scenarios when taking investment, risk and stewardship decisions.

 
‘Using scenario analysis for future resilience: top tips for pension fund chairs and trustees’, developed by A4S together with its asset owner network, says climate scenario analysis is frequently treated as a technical or compliance exercise, when it should be seen as a tool for board-level decision making.

 
“Pension trustees are sharply aware of the major long-term risks threatening to undermine economic performance and so the prospects for investment returns,” Dame Kate Barker, chair of the Universities Superannuation Scheme trustees, said. 

Developing a response to these risks can be “a daunting task” for trustees, she observed. 

Scenarios need to be increasingly sophisticated and move away from “the tempting simplicity of linear modelling”, Barker said, adding: “Even then we are reminded that all modelling has its limitations. So the ‘top tips’ set out here are welcome practical suggestions – a checklist for those already embarked on this path, and a to do list for those whose use of scenarios is less mature.” 

Pension funds operate in a world where the past is no reliable guide to the future, said said A4S executive director of capital markets and partnerships, Kerry King. 

“Boards do not need perfect predictions, but they do need analysis that helps them understand uncertainty, test resilience and make better-informed decisions,” she said. “One of the most useful elements of scenario analysis for boards is not the most technically complex. It is the analysis that changes the conversation in the boardroom and helps trustees understand what they may need to do differently.” 

The guide includes case studies and a set of questions that boards can ask service providers and in-house teams as it seeks to help trustees challenge assumptions, ensure analysis is informing decisions and combine quantitative modelling with narrative approaches, which A4S says “better reflect uncertainty and non-linear change”. 

The group argues that many climate scenario approaches give a misleading sense of precision, especially those that rely on linear models that do not fully capture tipping points, physical risks, nature loss, geopolitical instability, rapid adoption of artificial intelligence, inflation, supply chain disruption and other systemic risks. 

These risks have implications for asset allocation, default strategy design, liquidity, risk appetite, stewardship priorities and long-term member outcomes, but they cannot be diversified away, according to A4S.