Assessing portfolio exposure to climate change to improve risk-return of investment strategies

Climate-related financial risk assessment tools available to financial institutions often have a sector focus. Asset managers, however, often have diversified, cross and multi-sector portfolios. To address this challenge, Itaú Asset Management developed a proprietary tool to forecast the financial impacts of climate-related risks and opportunities on all companies in their portfolio, across all sectors. The tool first runs a ‘materiality analysis’ using a sector matrix developed internally taking into consideration which climate impacts will be the most relevant for each sector. Issues considered include changes in consumption patterns, exposure to physical climate impacts, changes in the water cycle, and carbon pricing. Then, it models companies’ performance under three scenarios with varying carbon prices: a 1.5°C temperature rise, a 2°C rise, and a business-as-usual scenario. The two-layered analysis performed by the tool helps Itaú Asset Management estimate expected climate-adjusted returns, which in turn are important inputs into investment decisions.