Strategic Report | Governance | Financial Statements | 49
LIFETIME MORTGAGE PORTFOLIO The Lifetime Mortgage portfolio’s carbon footprint is calculated using the estimated emissions data based on the EPC rating of the property on which the lifetime mortgage is secured and calculated based on CO 2 intensity factors from the SAP 2012 methodology. 2023 emissions calculations used an analysis of the current split between energy from different heat sources across the portfolio, giving a percentage of gas, electricity, oil, etc. These percentages were used to calculate a weighted average CO 2 intensity factor based on the energy mix of the current portfolio but using the intensity factor from the SAP 2012 documentation. For 38% of properties we use the rating on the record, and for 58% of properties we use an estimated rating. There is not an emissions standard for lifetime mortgages. We have calculated the emissions intensity based on the PCAF residential mortgage standard. The contribution of an individual property to the carbon emissions of the overall portfolio is based on current loan-to-value ratio of the relevant lifetime mortgage. We have used the current loan balance and property value to calculate the loan-to-value ratio. LIMITATIONS AND OUTCOMES The scenario analysis shows that the Group’s primary exposure is to transition risks based on both the DNZ scenario and NZ 2050 scenario. The DNZ scenario appears to have the most potential financial impact to Just. Whilst some conclusions can be drawn from our analysis, we recognise that there are limitations to our approach as noted below. In determining the potential impact on the Credit portfolio, we have used the data available for our liquid credit assets and estimated the remaining by taking sector averages, accounting for the investment time horizon. Sector averages can give an indication of the climate-related risks a company may face but do not account for the company-specific nature of these risks. The longer-term time horizon for projections on the Credit portfolio, to 2100, lends itself to greater uncertainty of potential future impacts. As a result, whilst some conclusions can be drawn from our analysis, we acknowledge that our data has limitations associated with it. We are continuing to address this area as part of our development work going forward. The analysis does not include cash/cash equivalents, derivatives, reinsurance assets and sovereigns bonds. Given the evolving nature of reporting on greenhouse gas emissions, we anticipate over time that issuers will provide more transparency and reporting on emissions. Therefore, we will continue to annually restate the carbon footprint figures for the portfolio as at the baseline year and subsequent years reflecting the overall improvements in availability of data and data quality, where relevant.
Potential Actions to Mitigate Climate Risks CREDIT PORTFOLIO
Within the Credit portfolio, as noted earlier, climate-related risk exposures appear to be the most prevalent across a subset of sectors. In our analysis we identified several potential management actions, which are also consistent with our stewardship objectives, to address these risks: • Enhance the data feeds and modelling approach to improve our overall analysis of impacts from climate related scenarios. • Engage further with our third party data providers and external asset managers to improve the quality of data used and to identify climate mitigation and adaptation investment opportunities. • Influence and engage to retrofit properties to upcoming regulatory EPC standards (such as by providing more capital). • Invest more towards assets that are committed to or are aligned with our net zero ambitions. • Restrict or reduce exposure to climate laggards within individual sectors. LIFETIME MORTGAGE PORTFOLIO The government’s stated aim is for as many homes as possible to be upgraded to an EPC rating of C by 2035 and it will consult on how this could be achieved. Other policy initiatives are expected with lenders being expected to play their part in encouraging improved energy performance among the properties on which they advance loans. An estimated three-quarters of the residential properties underlying our lifetime mortgage portfolio of our existing lifetime mortgages have an energy rating below the government’s target of an EPC rating of C. The lower the EPC rating, the more likely that the property’s value will be affected by this transition risk. We have a process in place to collect the EPC rating for all new Just branded mortgages. WHAT ARE OUR FUTURE PLANS FOR ENHANCING CLIMATE RISK MANAGEMENT OF THE INVESTMENT PORTFOLIO? We plan to: • Continue analysing the potential impacts of climate-related scenarios alongside emissions to identify areas of significant risk: – To mitigate these risks, identify specific actions such as engagement or divestment. – Further incorporate the scenario analysis data in day-to-day investment decision making. • Identify other sources of information to improve the overall quality of data used to analyse the physical and transition risks of climate change. • Develop an internal scoring system for classification of climate leaders/laggards by taking a materiality based approach. • Embed climate change risk factors in our lifetime mortgage lending decisions, if possible using a post code level risk rating.
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