Sustainability Report 2021 04.4 Strategy resilience, stress-tests and climate scenario analysis 01 Introduction We use pathways for financial and rates in 2050 relative to 2031 drive losses from 04.4.4 Bottom-up quantitative Our starting point is the carbon footprint of macroeconomic risk variables extending fixed income investments above losses from real carbon stress-test for investments listed equity and corporate bonds portfolios, as 02 Measuring and from 2020 to 2050 as provided by the Bank assets, especially affecting valuations of long- disclosed in section 04.6 using Scopes 1 and 2 managing sustainability of England. These are expanded to adapt dated bonds held for liability matching purposes. This year, we publish the results of our second emission figures. On this foundation, we apply sectoral and regional coverage to the Allianz Real estate prices decline further, driven by costs assessment modeling carbon risks for our carbon price shocks derived from the climate 03 Strengthening investment portfolio. Simple proxy models are of energy efficiency improvements. investment portfolio using a bottom-up approach. scenarios developed by the Network for Greening our foundation applied for some asset classes where suitable The disruptive onset of climate policy In 2020, we started with listed equity and we have the Financial System (NGFS). Please note that we valuation factors are missing in the scenario implementation under the LA scenario in 2031 now also included corporate bonds. This stress- updated the scenarios applied for this analysis 04 Climate-related data. To separate the impact of climate change causes a contraction of the overall economy test complements top-down approaches such as according to the latest available reference financial disclosure risk from trend growth, stress levels are assessed entailing immediate market value losses those put forward by financial markets regulators. scenarios published by the NGFS in 2021. 04.1 Highlights relative to a baseline or counterfactual scenario of the investment portfolio of close to -10 We see merit in a model which gives us full Under the scenarios, prices materialize over the 04.2 Governance and hypothetical variable pathways that percent. Impacts are most pronounced for transparency on methods and parameters, is easy coming ten years and depend significantly on 04.3 Strategy would be expected in the absence of transition real assets, where a rise in risk premia adds to to implement and gives a first understanding of intensity of policy action and underlying scenario 04.4 Strategy resilience, stress-tests and or physical risk. Instantaneous stress on the direct consequences from transition policies on the evolution of potential climate impacts on our assumptions. The model assumes instantaneous climate scenario analysis static year end 2021 investment portfolio is emissions intensive sectors. Credit spreads rise portfolio. It also provides opportunities to cross- change of effective carbon prices applied to the 04.5 Risk and opportunity management assumed for the calculation of stress impacts, substantially for the same reason, driving losses check external methodologies and potentially portfolio, with no mitigation actions. 04.6 Targets and metrics without adaptation or mitigation actions. from fixed income investments. Economic recovery develop more elaborate models going forward. One major benefit of the CBES 2021 scenarios by 2050 and progress made in transitioning to To re-emphasize, this version of our assessment 05 Our universal principles is their comprehensiveness. This supports low-carbon production reduces market value Methods, assumptions and limitations focuses on listed equity and corporate bonds ease-of-use for stress testing as compared to losses for equity and alternative investments Our approach uses effective carbon prices as impacts only. It does not account for factors like other scenarios. The magnitude of outcomes, relative to 2031, whereas losses on real estate a proxy for policy intensity, e.g. actual carbon different physical asset bases and resulting lock- however, have to be taken with a pinch of salt investments increase above 2031 levels, pricing, energy-related subsidies and incentives, ins, cost pass-through abilities, price elasticities or accounting for the crucial role of assumptions similar to the EA scenario. While credit spreads standards for energy efficiency and emissions. regulatory relief. It also does not yet differentiate made in building the scenarios. This notably tighten by 2050, higher long-term interest rates between Scopes 1 and 2 emissions and, The fundamental idea is that an increase in importantly, it assumes companies do not respond includes assumptions for the counterfactual increase losses from fixed income investments emissions price entails a decrease in earnings to climate policy trends such as governmental net- scenario which have a critical impact on results. as compared to 2031, entailing about -12 at the level of individual investee companies. zero strategies by lowering their carbon exposure. Under the EA scenario, overall market value losses percent market value losses of the overall This decrease in earnings can be translated These factors will be incorporated in future more of the investment portfolio from gradual climate investment portfolio. into a stock market value loss based on price- elaborate versions of the assessment. The impacts policy implementation remain limited to below Under the NAA scenario, the investment portfolio to-earnings multiples. The model requires for corporate bonds rely on a high-level estimate -2 percent in 2031. This is largely determined experiences minor market value losses of assumptions, for example on cost pass-through, of the statistical relationship between the by muted impacts on fixed income investments, roughly -3 percent in 2050 resulting from a loss price elasticities and regulatory easing (either movements of a corporate bond‘s spread and by far the largest exposure in the portfolio. of economic production due to global warming. explicitly or implicitly via effective carbon prices). the respective issuer’s equity market value. In comparison, real assets suffer somewhat higher Substantially more severe consequences across all These are kept simple for this first version and will losses on a standalone basis but contribute less asset classes are predicted for late in the century. need to be further refined moving forwards. to overall market value losses due to a lower For our strategic response to identified risks share in the portfolio. This picture changes please see 04.4.6. when moving forward to 2050, where overall market value losses increase in the order of -10 percent. Substantially higher long-term interest 78