Sustainability Report 2021 04.4 Strategy resilience, stress-tests and climate scenario analysis 01 Introduction Climate change considerations from climate change, test our business strategy When we conduct analyses which assess 1.5°C Complementary bottom-up modeling for the most are an integral part of our and inform risk management and business scenario alignment, we adjust our scenario relevant exposures provides insights into climate 02 Measuring and decision making. selection using guidance developed by the AOA change risks at the level of individual investment managing sustainability insurance and investment We perform sensitivity and scenario analyses which is focused on 1.5°C scenarios with no or or underwriting projects and may support with time horizons up to 2050 and including low overshoot of 1.5°C of warming which limits contextualization of results from top-down 03 Strengthening strategy. scenarios ranging from 1.5°C to 4°C of average the need to remove GHG emissions from the analyses. This is showcased in the carbon price our foundation We apply various quantitative and qualitative warming by the end of the century. We make use atmosphere in the second half of the century. stress-test for listed equity and corporate bonds in approaches to carry out climate stress testing of internal models and external tools. While time When conducting outside-in impact scenario section 04.4.4, the inland flood risk case study for 04 Climate-related and scenario analysis in consideration of the long horizons naturally differ depending on the lines analysis, we use a broader range of scenarios real estate (see case study on page 80) and the financial disclosure time horizons over which climate change may of business under consideration, the range of in terms of temperature outcomes and analysis of inland flood and tropical cyclone risks 04.1 Highlights unfold and the high uncertainty over the direction scenarios we apply allows us to better assess the characteristics. Qualitative assessments are for property insurance liabilities in section 04.4.5. 04.2 Governance of future climate and economic developments. variety of risks and opportunities associated with conducted to explore to what extent and across Note that the analyses included in this report 04.3 Strategy Our objective is to foster risk awareness, build climate change. which channels climate change risks affect reflect our current approaches to climate change 04.4 Strategy resilience, stress-tests and expertise in the assessment of financial risks different aspects of our business, unconstrained risk assessments. Prevailing methodological and climate scenario analysis by the still limited availability of quantitative data limitations as well as the high degree of 04.5 Risk and opportunity management models. As an example, we report results from uncertainty inherent in any long-term analysis 04.6 Targets and metrics Aspects covered Scenarios used Scenario provider qualitative exposure screening for investments may still limit decision-usefulness of some results. 05 Our universal principles Transition and physical • Climate Biennial Exploratory Scenario Bank of England using a transition risk heat map in section 04.4.1 However, these approaches will change over time • General Insurance Stress-test 2019 and insights from a survey based assessment for as climate scenarios evolve in line with research, Transition and physical • Orderly Network for Greening the P&C retail business in section 04.4.2. developmental-stage methods improve further • Disorderly Financial System We deploy quantitative assessments for indicative and industry best-practices emerge. • Hot-house (for physical) sizing of our exposure to climate change risks. Transition • 53 scenarios used for Special Report Intergovernmental Panel on Climate A top-down approach is developed to assess risks on Global Warming of 1.5°C (no and Change (IPCC) (building on a multitude at the level of our balance sheet, in a first step low overshoot) of scenario providers) applying scenario data provided by the Bank Transition • Net-zero by 2050 International Energy Agency of England for the Climate Biennial Exploratory • Sustainable Development Scenario Scenario 2021 (CBES 2021) for the analysis of our investment portfolio presented in section 04.4.3. • Beyond 2˚ Scenario • Stated Policies Scenario Short-term Medium-term Long-term • 2° Scenario Transition • One Earth Climate Model University of Technology Sydney Up to three years Three – ten years Ten+ years Transition • RPS Inevitable Policy Response As defined, for instance, Needed for establishing As, for instance, required for • FPS in our standard Top Risk solvency considerations and strategic decisions and transactions Assessment process. capital adequacy. with investment horizons of Physical • RCP1 4.5 IPCC several decades like real estate • RCP1 8.5 and infrastructure. • RCP1 2.6 will be implemented in the course of 2022 1 Representative concentration pathway. 73