Just Group plc | Annual Report and Accounts 2024
48
sustainability: TCFD continued
FURTHER ANALYSIS OF SCENARIOS ENERGY SUPPLY AND BUSINESS INTERRUPTION
disorderly
too little too late
Energy supply risks were identified across all three scenarios. This includes load shedding, rationing or a rapid increase in prices. The effects of this risk include increased demand for office space, increased costs for employees and the business and a reduction in operational capabilities. Physical risks of severe weather events could result, in some scenarios, in damage to our servers or other critical third-party infrastructure. Energy security concerns for the UK were also agreed to be prevalent in all scenarios, including an acceptance that this risk is already materialising. Even in the ‘Net Zero 2050’ scenario, the risk was still considered to remain through, for example, an increase in the deployment of retrofitting technologies and associated energy demand. Current management actions are helping to manage the risk on our critical infrastructure, such as annual failover and disaster recovery tests that are conducted with our third-party data centres. Further management actions were identified to help us to prepare for scenarios of high energy prices or low National Grid supply, including a focus on how these might affect our ability for staff to work from home and their well-being. LITIGATION AND REGULATION Litigation risk comes from group action lawsuits directly or indirectly against Just or the wider financial services industry. In scenarios with a high physical risk, windfall taxes could be introduced on businesses seen to profit from the negative effects of climate change, such as life insurers. Additionally future climate related litigation and regulation are uncertain and could create an increased need for resources or material adaptation in our products and services to remain compliant. In scenarios where the transition away from fossil fuels nears completion, it was considered that the focus of climate-related group action lawsuits could start to turn to other high emitting sectors. The financial services industry produces the most emissions from its investments and it was discussed that in all scenarios, those who fail to make progress on decarbonising their investment portfolio or meet publicly stated targets, could conceivably become the new target of such groups. The risk of an increase in climate related regulations for the financial services industry materialising was viewed as inevitable. Whilst the ‘Current Policies’ scenario looks at an effective freeze on any further legislation and regulation, it was considered to be unrealistic. A ‘Current Policies’ scenario (a 3C degree global warming average) could still materialise even with further litigation and regulation. For a Net Zero 2050 scenario this looked like an introduction of minimum energy standards for properties as well as more stringent Solvency requirements as regulators seek to ensure business can cope with the physical losses of climate change or the transitional burdens. This could be through increased quantitative requirements, increased risk management requirements and/or increased disclosure requirements. INSURANCE RISK (MORTALITY, LONGEVITY AND MORBIDITY) The Group’s primary insurance risk exposure is to longevity risk, through the products we sell. In recent decades, life expectancy has improved due to medical advances and lifestyle changes, which can be expected to continue. Interacting factors, including government policy and individual lifestyle choices, make it difficult to accurately predict how much climate change could impact on longevity, but this can be expected to evolve gradually over the years. All the three scenarios explored could benefit the profitability of the products we sell, however consideration needs to be given to the reliability of models upon which this is based. Windfall taxes could be imposed on businesses seen to profit from the negative effects of climate change on people, especially in high physical risk scenarios. In all scenarios, the inaccuracy of mortality assumptions could lead to model risk failures if the effects of climate change are not properly factored in. Examples include increase in mortality from heat related deaths and reductions in mortality from improved air quality or a society-wide transition to a vegetarian or low-meat diet.
Delayed Transition
Net Zero 2050
Current Policies
orderly
Hot house world
Physical Risks
Low
High
OUR APPROACH The qualitative side of our scenario testing exercise consisted of the running of four workshops each centred around a key risk. These were: energy supply and business interruption, litigation and regulation, insurance (mortality, longevity and morbidity) and property (investments). The workshop discussions then took each of the three NGFS scenarios in turn, considering specifically what risks could materialise in each scenario, alongside what early warning indicators and pre-emptive and mitigatory management actions could be taken. From this, identification was possible of the gaps between what we are currently doing, what we could be doing and what we may want to consider doing should the scenario in question start to manifest. This also gave us an insight into the opportunities that could exist for us to capitalise on. For the quantitative side of the exercise we utilise MSCI data, by mapping to the three chosen NGFS scenarios, to produce an updated Climate Value-at-Risk (CVaR) metric (further details of this can be found on page 51). Following this exercise we reviewed the data and undertook an analysis of change for the numbers to identify the key drivers for the changes and how each of the three scenarios could potentially affect our credit portfolio. For our LTM portfolio support from external specialists was used to provide us with modelling outputs and an explanation of the three chosen NGFS scenarios’ potential impact. Both the credit portfolio and the LTM portfolio consider the physical and transition risks of climate change.
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