Climate Value-at-Risk

msci.comSCENARIO ANALYSIS FROM MSCIClimate change –a key risk forinstitutional investors
Climate change may pose a systemic risk to the financial sector, whilst also producing
new investment opportunities. Managing these risks and capturing new opportunities
can be crucial to protecting investment and optimizing performance while at the sametime reaching sustainability and climate goals such as achieving a Net-Zero target.

Climate-related financial impacts

In July 2021, two daysof extreme rainfall overwestern Germany resulted in~EUR 1.3 billion in damages
for a German rail company.1

One major Taiwanesechipmaker reportedly increased
its budget for water sourcing in
2021 up to ~USD 26.8 million
in the face of severe drought
conditions.2

One US utility estimated thecost of mitigating wildfire
risks to their business would
be USD 11.7 billion for
2019-2022.3

Focus onclimatechange

MSCI ESG Research has worked with institutional

Our climate change solutions are designed toinvestors for more than 20 years to enable them tosupport investors seeking to achieve a range

incorporate climate change considerations in theirof objectives, including measuring and reporting

investment process by providing an extensive

on climate risk exposure, implementing low

view of climate change risks and opportunities

carbon and fossil fuel-free strategies, andacross multiple dimensions: emissions data, fossil

factoring climate change research into theirfuel exposure, and clean technology exposure.

risk management processes.

1 “German Railway: Floods Caused $1.5 billion Damage to Network.” Associated Press, Jul. 23, 2021.
https://apnews.com/article/europe-floods-0637d4aaaa9469595b9df8c98b488a2d#:~:text=At%20least%20180%20people%20died,overall%20death%20toll%20to%20211
2 https://udn.com/news/story/7240/5474061
3 PG&E 2020 CDP questionnaire: https://www.pgecorp.com/corp_responsibility/reports/2020/assets/PG&E_Corporation_-_ _CDP_Climate_Change_Questionnaire_2020.pdf

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MSCI ESG Research’s

ClimateValue-at-Risk
Climate Value-at-Risk (Climate VaR) is designed to provide a forward-looking
and return-based valuation assessment to measure climate related risks andopportunities in an investment portfolio. The fully quantitative model offers
deep insights into how climate change could affect company valuations.

How Climate VaR can help you to prepare your institution

Your tool to uncover

climate risks
and opportunities

Companies are affected by climate change in different ways. Extreme weather
could damage assets at a company facility or the introduction of new climate change
policies could require technological change and incur costs to reduce emissions, orreduce demand for products. All climate change impacts can be translated into abalance sheet impact with the Climate Value-at-Risk model. By calculating the financial
risks from climate change per security and per scenario, MSCI ESG Research provides
a framework that is designed to help investors identify and understand these risks andtake necessary action for portfolio performance optimization, risk management andregulatory reporting purposes.

Modeling approach

Impactmodeling

Cost / profit
calculation

Security
valuation

Portfolio
aggregation

TCFD alignment
Investment managers

Banks

Actionable insights to evaluate climate-related risks

Calculations to identify optimal low carbon investment

and opportunities. Identify potential alpha factors inprojects within a loan book or credit portfolio. Accesslow carbon technology innovation. They can create new

our quantitative model to help establish a process toinvestment products with forward-looking scenario

protect credit portfolios and establish a disclosure

based data.

framework.

Asset owners

Insurance companies

Identification of long-term, climate-related impacts

Deep outlooks into the future physical impacts offor asset allocation, external manager evaluation
and regulatory disclosure.
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climate change and how these changes could affectinsurance premiums and underwriting.

The G20 Financial Stability Board’s Task Force on
Climate-related Financial Disclosures (TCFD)
released recommendations in June 2017 and updated
in 2021, which highlighted the importance of using
scenario analysis to assess climate change related
impacts within the financial sector.
It calls for the assessment of both the risk andopportunity side of transition and physical climatechange impacts. It creates a reporting frameworkthat allows institutions to prepare themselves forupcoming regulations. Many investors have yet toimplement scenario analysis but this is an essentialaspect of the TCFD Recommendations.

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Transition risks and opportunities

Security-specificmodeling results

The policy scenarios aggregate future policy costs based on

opportunity in their investment portfolios.

an end of the century time horizon. By overlaying climate

The technology scenarios identify current green revenues aspolicy outlooks and future emission reduction price estimates
onto company data, MSCI ESG Research’s model provides
insights into how current and forthcoming climate policies may
affect companies.

Coverage across asset classes

MSCI ESG Research’s climate change risk and opportunity calculations cover more than 10,000 companies, assessing
all of their associated equities and corporate bonds as part of the analysis.

With the expansion of MSCI ESG Research’s new Scopevalue chain GHG emissions (Scope 3), alongside policy risk

its relating to their portfolio’s exposure to future climate change impacts. MSCI ESG Research supports clients whenfrom direct GHG emissions (Scope 1). In this way, the Climate
VaR framework is designed to help investors to understandthe potential climate-related downside risk and/or upsideed transition and physical cost and profit projections until the end
High

MSCI Climate VaR covers more than 10,000 companies, assessing all of their associated equities and corporate

available

Technology

Physical risk &Opportunities

opportunities

12,500 entities directly
covered; 19,000 with
Listed Equity &Corporate bonds

inheritance
IMI and 95% of BBG

Low

Barclays Global Agg Corporate
Sovereign Bonds

Commercial Real Estate

1 million real assets

and recommended scenarios commonly adopted in the market,
now considered as market standard for modeling the financial
impact of climate scenarios.

Delayedtransition

Below2°CNDCs

Hot house world

Physical risks

How aligned is your portfolio withthe Paris Climate Target?

6.0ºC

Implied Temperature Rise from MSCI ESG Research isend 2022

another forward-looking metric designed to show thePhysical risks and opportunities

Financial impact modeling

The physical scenarios evaluate the impact and financial

Climate VaR provides insights into the potential climate-risk relating to a comprehensive set of extreme weather

stressed market valuation of investment portfolios andhazards including extreme heat and cold, heavy snowfall

downside risks. MSCI ESG Research’s financial modelingand precipitation, wind gusts, tropical cyclones and coastal

approach translates climate-related costs into valuation

To learn more about Implied Temperature Rise visit

flooding/sea level rise. Our data sources and assessment

impacts on companies and their publicly tradable securities.

methods have been established with input from the renowned

In this way, the Climate VaR framework is designed to help

msci.com/implied-temperature-rise

Potsdam Institute for Climate Impact Research (PIK). MSCI

investors to understand the potential climate-related downside

ESG Research utilises a global facility database to accurately

risk and/or upside opportunity in their investment portfolios.

warehouses, factories and offices.

High

Positioning of scenarios is approximate based on an assessment of physical and transitio risks out to 2100.

Forthcoming by year

assess the impact of physical risks on company assets such as

Current
policies

OrderlyLow

On demand
Private Equity & Debt

Net-Zero
2050(1.5°C)

Including 100% of ACWI

46 markets and +9k
securities

gathers 114 central bank and prudential regulator members4

Too little, too late

DivergentNet-Zero(1.5°C)

Transition risks

Policy risk

NGFS. The NGFS (Network for Greening the Financial System)

Disorderlybonds, 9000+ sovereign bonds and for more than 1 million private real estate assets.
Coverageframeworks including those recommended by the IPCC andNGFS scenarios frameworkof the century.

MSCI Scenario Analysis

green revenues and profits of corporations based on their low
We align the transition and physical risk scenarios with key

3 emissions estimation data, the model now includes theMSCI ESG Research’s Climate VaR financial metric helps investors to better assess potential future costs and/or prof-

valuation of security holdings. Climate VaR provides a stressed market valuation of a security in relation to aggregat-

the relative quality score of each patent over time and forecast
carbon innovative capacities.

integration of policy risk from electricity use (scope 2) and fromthey want to understand company and portfolio wide risk exposure, and what that might mean towards the current

well as the low carbon patents held by companies, calculate

temperature alignment of companies, portfolios, funds
and indexes with global climate targets.

3.0ºC
2.0ºC
1.5ºC

Climate Value-at-Risk

0.0ºC

Schedule a demo today at msci.com/climate-var
4 As of April 2022, https://www.ngfs.net/sites/default/files/media/2021/08/27/ngfs_climate_scenarios_phase2_june2021.pdf

6 msci.com

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About MSCI Inc.
MSCI is a leading provider of critical decision support tools and services for the global investment community. With
over 50 years of expertise in research, data and technology, we power better investment decisions by enabling clientsto understand and analyze key drivers of risk and return and confidently build more effective portfolios. We create
industry-leading research-enhanced solutions that clients use to gain insight into and improve transparency across theinvestment process.
To learn more, please visit www.msci.com.

About MSCI ESG Research Products and Services
MSCI ESG Research products and services are provided by MSCI ESG Research LLC, and are designed to provide indepth research, ratings and analysis of environmental, social and governance-related business practices to companies
worldwide. ESG ratings, data and analysis from MSCI ESG Research LLC. are also used in the construction of the MSCIESG Indexes. MSCI ESG Research LLC. is a Registered Investment Adviser under the Investment Advisers Act of 1940 anda subsidiary of MSCI Inc.

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