GOVERNANCE
FINANCIAL STATEMENTS
strategic report
FURTHER ANALYSIS OF KEY RISKS NON-LTM PORTFOLIO RISKS:
ILLIQUID INVESTMENTS (COMMERCIAL MORTGAGES, INFRASTRUCTURE LOANS, OTHER PRIVATE DEBT) Assessing the risks to our illiquid investments is challenging due to the lack of specific data as the borrowers are not subject to disclosure requirements. We work alongside our asset managers to understand the most material ESG risks (including climate-related physical and transition risks) inherent within these investments. We expect some of our illiquid assets to exhibit less transitional risk than our liquid bond portfolio where these assets are linked to renewable energy production and energy-efficient buildings. For real estate and other infrastructure debt assets, given the illiquid nature of these investments, the transition to net zero is expected to be the dominant risk with potential costs associated with mitigation and adaptation. WHAT PROGRESS HAVE WE MADE TO IMPROVE OUR BROADER CLIMATE RISK MANAGEMENT ACROSS THE NON-LTM PORTFOLIO? Over the last 12 months, we have implemented a revised responsible investment strategy to continue enhancing our approach, including improving the management of climate-related risks. As such, we have: • enhanced our engagement with our external asset managers to understand their approach and commitments to achieving net zero and our wider RI objectives; – joined the Partnership for Carbon Accounting Financial (“PCAF”) – to continue enhancing our approach to estimating our emissions, where emissions data is unavailable; – submitted a statement of intent to join the Net zero Asset Owner’s Alliance – to continue aligning our decarbonisation strategy with a recognised initiative; and – joined the Financial Institutions Focus Group for the Net Zero Data Public Utility – feeding into the climate data steering committee run by Glasgow Financial Alliance for Net Zero (“GFANZ”); • strengthened the Group’s expertise and resources in responsible investing; and • identified a data provider to help us estimate portfolio emissions, aiming to apply principles of the PCAF methodology where possible. LTM PORTFOLIO Our property underwriting assessments allow for existing flood and coastal erosion risk. We are undertaking climate change scenario analysis to improve our understanding of how our lending policy and underwriting approach need to evolve to manage any future exposure to climate change risk.
Our credit investments are held as long-term investments. Although the value of the investments may be affected over time by the market’s view of the borrower’s credit standing, it is the borrower’s ability to repay the debt that affects us the most. Transition risks: The companies to which we lend could face additional costs due to the nature and rate of the transition or, as a result of substitutability, assets could become stranded. Physical risks: Depending on the location, assets we are invested in may face higher costs from extreme weather events or sustained asset damage and business interruption due to impacts from longer duration physical impacts of climate change. Material increased costs to the borrower, as a result of climate change, may affect their ability to meet their debt repayment obligations, increasing the risk of default. LTM PORTFOLIO RISKS Just Group is exposed to property risk on the LTMs held on our IFRS balance sheet. These LTMs are secured against residential properties located across the UK. If the sale proceeds from the property are insufficient to repay the accumulated loan balance on the death or entry into long-term care of the customer, Just would suffer a loss due to the no-negative equity guarantee. INSURANCE RISK The Group’s primary insurance risk exposure is to longevity risk, through products such as our Guaranteed Income for Life product. In recent decades life expectancy has improved due to medical advances and lifestyle changes, which can be expected to continue. Most deaths in this country relate to conditions such as heart disease and cancer, with air pollution contributing to around 5% of all UK deaths. The overall impact of climate change on longevity is likely to be secondary through lifestyle changes rather than direct. 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. The insurance risk exposures to climate change are highly uncertain and have not yet been quantified in the Group’s risk scenarios, therefore no explicit allowance is made. Developments in this area will be carefully monitored.
RISK MANAGEMENT NON-LTM PORTFOLIO
Our climate risk investment strategy is based on the following key tenets: • understand the risks to our investments posed by climate change • take advantage of opportunities afforded by the transition to a lower carbon economy • engage in and influence change in the market to the extent that this is efficient and possible • decarbonise our portfolio in line with our Group commitments (more information on our decarbonisation strategy can be found in our transition plan). Our Responsible Investment Framework seeks to manage the risk exposure arising from broader ESG risks, including climate change and is monitored by the Investment Committee. The Framework uses the following scoring system (“PRAYG”): • Purple – excluded: divestment and no new investment • Red – restricted: no new investment • Amber – watchlist: investment permitted but close monitoring required • Yellow – neutral: investment permitted • Green – positive impact: investment encouraged All Just’s existing and prospective investments, where we have veto rights in place are scored in this way to ensure a consistent and robust approach is taken to assessing their ESG risks, including climate-related factors. In the case of funds, where we do not have a veto right, a red, amber, or green status is applied at the fund level. LIQUID INVESTMENTS In addition to assessing ESG risks, we have measured the Climate Value at Risk (“CVaR”) for our liquid corporate bond portfolio, where climate data is readily available – around 72% coverage of the portfolio. This forms part of our scenario analysis approach, where we have used projected pathways, in line with the Network for Greening the Financial Services (“NGFS”) scenarios outlined later in this section.
METRICS AND TARGETS The metrics below are used for our liquid corporate bond portfolio:
CLIMATE VALUE-AT-RISK (“CVAR”) A risk metric which is an estimation of scenario-specific valuation impact for transition and physical impacts, at both an issuer and portfolio level. WARMING POTENTIAL An impact metric which gives a portfolio’s alignment with future climate goals based on projected business activities of invested companies. CARBON FOOTPRINT An impact metric that gives the GHG emissions at an issuer and portfolio level.
The CVaR and warming potential metrics are purely illustrative as they project far into the future based on assumptions about our existing investment portfolio. The longer the time period that data is projected into the future, the more uncertainty in the results. The carbon footprint metric reflects the emissions of our current portfolio. We expect each of these metrics to reduce as the composition of our investment portfolio changes over the years through the application of our Responsible Investment Framework.
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