GOVERNANCE
FINANCIAL STATEMENTS
strategic report
A combination of reported and estimated data has been used to calculate the carbon footprint of the portfolio using nominal values; this includes our third party data provider applying the principles under version one of the Partnership for Carbon Accounting Financials (“PCAF”). For asset classes where no approach has yet been identified by PCAF, our third party data provider has applied an appropriate approach that is similar to the PCAF framework. Where data was not provided issuer data was overlaid for bonds that had already matured in the portfolio and another unweighted sector average was applied to remaining gaps to produce a full portfolio footprint. This covers c.30% of the 2019 data, c.25% of the 2020 data and c.27% of 2021 data. We acknowledge there is double counting in producing the carbon footprint data and have therefore split the data by scope of emissions. Data could be subject to change due to improvements in data quality going forward. The carbon footprint of the non-LTM portfolio has been derived using a combination of reported and estimated emissions data and supplied by our third party data provider. It does not include cash/cash equivalents, derivatives and reinsurance assets. It also uses a series of further estimations based on the data on the portfolio to close the gaps in the dataset, where our third party data provider was unable to provide information. The LTM portfolio carbon footprint is calculated using the estimated emissions data based on the EPC rating of the property on which the LTM is secured. For 34% of properties we use the rating on the record and for 66% of properties, we use an estimated rating. The contribution of an individual property to the carbon emissions of the overall portfolio is based on the loan-to value ratio of the relevant LTM. LIMITATIONS AND OUTCOMES The scenario analysis shows that the Group’s primary exposure is to transition risks based on both the DNZ scenario and NZ2050 scenario. The DNZ scenario appears to have the most onerous financial impact to Just. Whilst some conclusions can be drawn from our analysis, we recognise that there are limitations to our approach as it is to a degree reliant on qualitative analysis. There are also gaps in the data available, which means the analysis may not reflect potential costs or impact across the entire portfolio. We will continue enhancing our approach in the coming years to improve our analysis of climate-related scenarios. NON-LTM PORTFOLIO Within the investment 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 to address these risks: • Engage further with our external asset managers 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. LTM 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 THE CLIMATE RISK MANAGEMENT OF THE NON-LTM AND LTM PORTFOLIOS? We plan to: • identify another data provider to support with further analysis of the physical and transitional climate-related risks • enhance our approach to climate assessments of existing and new investments to supplement our PRAYG scoring • align our transition plan with external initiatives in line with our commitments (i.e. SBTi, NZAOA) • enhance and further integrate an appropriate stewardship strategy in support of climate change and our wider responsible investment commitments • embed climate change risk factors in our LTM lending decisions, if possible using post code level risk ratings.
GROUP ILLUSTRATIVE IMPACTS OF TRANSITION AND PHYSICAL RISK SCENARIOS, PRE-MANAGEMENT ACTIONS The results of our quantitative analysis relating to the non-LTM portfolio and the LTM portfolio are shown in the table below. The metrics show the illustrative impacts on our existing non-LTM portfolio if it were to remain unchanged to 2070. The analysis assumes no changes in the investment portfolio and does not consider the Group’s cash/cash equivalent holdings, derivatives and reinsurance assets. As a result of our upcoming 2023 project focussed on scenario analysis and further enhancing our internal capabilities, for consistency we have retained the methodology and data from our approach in 2021 with a view to enhancing these disclosures following on from our 2023 project.
DIVERGENT NET ZERO 2050 NET ZERO 2050
CURRENT POLICIES (HOT HOUSE WORLD)
SUB-PORTFOLIO
Liquid Corporate Bonds1
-7.0% CVaR -6.0% CVaR -4.4% CVaR
LTMs2 0.2% Results as at 1 31 December 2021 illustrative expected loss on 70% of the liquid investments of the non-LTM portfolio, 2 31 December 2021 – estimated property value at risk. 3.6% 3.6% This modelling suggests that transition risk may be a more material risk to our non-LTM portfolio than physical risk. A 1.5°C temperature rise produces higher impacts because the rate of decarbonisation is the greatest under this scenario, leading to potential highest costs for the bond issuers. The illustrative warming potential of the existing portfolio suggests the issuers’ emissions are aligned to warming the planet by 3.1°C by 2100 in a scenario aimed at limiting global warming to 1.5°C. Similarly, the modelling of the LTM portfolio shows that transition risk is likely to be the most material risk. We estimate transition risk arising from the introduction of minimum EPC standards (based on assumptions stated in the Climate Biennial Exploratory Scenario (“CBES”)) could lead to a 3.4% reduction in property values under the net zero scenarios. This reduction in property value would only affect Just in instances where it leads to the property sale price being lower than the loan balance. We have not made explicit allowance for transition risk within our reported numbers. The estimated potential impact of transition risk on property values is based on the UK government implementing a minimum EPC standard of C and this has not been confirmed as a government policy yet. Any impact would be incremental over a period of years as and when loans become repayable following the customer’s death or entry into long-term care. The impact may be mitigated by the extent to which government softens the blow for homeowners through grants and subsidies. Our physical risk modelling estimates that they lead to at most a 0.2% reduction in property values by 2080. Of the physical risks to which we are exposed, increased flood risk due to climate change is expected to have the most material impact. Analysis suggests that our exposure to properties classed as having a high flood risk could increase steadily from 0.3% now to 1.5% by 2080 of properties backing our lifetime mortgages. Under the ‘Current Policies’ scenario, this could mean an additional 200 properties exposed to high flood risk by 2080 out of a portfolio of 55,000 properties. The projections suggest that a similar pattern of increasing risk of subsidence over time due to climate change increasing the chances of lengthy periods of drought. Under the most severe scenario considered, about 100 more properties could be exposed to subsidence by 2080. Analysis indicates that our exposure to properties where coastal erosion is likely would remain insignificant over the period to 2080. The carbon footprint of the non-LTM portfolio and the LTMs is shown below:
BUSINESS AREA
YEAR
COVERAGE
CARBON FOOTPRINT
2019
99.8% Scope 1&2: 84 Scope 3: 407 99.8% Scope 1&2: 95 Scope 3: 372 99.8% Scope 1&2: 111 Scope 3: 377
Investments (tCO 2 e/$m nominal invested)
2020
2021
2019 2020 2 2021 2022
100% 1
23.2
Lifetime Mortgage (tCO 2 e tonnes per annum)
95% 13.1 100% 14.2
1 c.60% of the LTM portfolio emissions is estimated each year. 2 2020 data not collected for LTM portfolio.
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