Trillions of dollars at stake from climate change

Wednesday 16th February 2011

• Climate change could contribute as much as 10% to investment portfolio risk over the next 20 years
• Investors could benefit from increased allocation to infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets
• Investment requirements in low carbon technology could be as high as USD$5 trillion by 2030
• Institutional investors have numerous options for capitalising on opportunities and managing risks arising from climate change

Continued delay in climate change policy action and lack of international coordination could cost institutional investors trillions of dollars over the coming decades, according to research released by Mercer and a group of leading global investors representing around US$2 trillion in assets under management[1].

Andrew Kirton, Global Chief Investment Officer at Mercer, said climate change brings fundamental implications for investment patterns, risks and rewards.

“Institutional investors should be factoring long-term considerations, such as climate change, into their strategic planning. Mercer is pleased to have had the opportunity to kick start such strategic discussions with a group of leading global investors”, Mr Kirton said.

Helga Birgden, Head of Responsible Investing for Asia Pacific at Mercer said the report highlights threats and opportunities for investors in Australia and New Zealand.

“This region in particular is vulnerable to environmental impacts and is therefore exposed to climate change, as a mega theme, in a range of areas. On the flip side, our region is leading developments in low carbon technology which creates investment opportunities and the potential for economic transformation.”

“It’s important that in the face of climate change investors are developing new strategies to ensure their resilience over time. We are advising investors to increase their allocation to ’climate sensitive’ assets to mitigate risks but also capture the new investment opportunities. Additionally, investors can engage with policy makers to minimise the risk of poorly co-ordinated and delayed climate policy action on investment portfolios.”

The report Climate Change Scenarios – Implications for Strategic Asset Allocation analyses the potential financial impacts of climate change on investors’ portfolios, identified through a series of four climate change scenarios playing out to 2030. The report identifies a series of pragmatic steps for institutional investors to consider in their strategic asset allocation.

In the report, a framework is outlined that can be used by institutional investors to enhance their understanding of climate-related investment risks and opportunities across asset classes and regions. Mercer’s ‘TIP Framework’ estimates the rate of investment into low carbon technologies (T), the impacts (I) on the physical environment and the implied cost of carbon resulting from global policy (P) developments across the four climate scenarios.

Some of the key findings show that by 2030:
Climate change increases uncertainty for long term institutional investors and as such, needs to be pro-actively managed.
Investment requirements in low carbon technologies could reach USD$5 trillion.
The cost of impacts on the physical environment, health and food security could exceed USD$4 trillion.
Climate change related policy changes could increase the cost of carbon emissions by as much as USD$8 trillion.
Increasing allocation to ‘climate sensitive’ assets will help to mitigate risks and capture new opportunities.
Engagement with policy makers is crucial for institutional investors to pro-actively manage the potential costs of delayed and poorly co-ordinated climate policy action.
Policy developments at the country level will produce new investment opportunities as well as risks that need to be constantly monitored.
The EU and China/East Asia are set to lead investment in low carbon technology and efficiency improvements over the coming decades.

The launch of the report and the Mercer TIP Framework represents a collaborative endeavour led by Mercer which involved 14 global institutional investors, and was supported by International Finance Corporation, a member of the World Bank Group, and Carbon Trust. Grantham LSE/Vivid Economics were engaged to lead components of the research on the economic impacts of climate change scenarios and a research group comprised of industry practitioners and academics was consulted in the development of the model.

Project partners, in commenting on the research and its outcomes, said;

“VicSuper has taken an active position in integrating sustainability into its investment strategy. This has involved investing in low-carbon equity funds such as the Vanguard Carbon Aware International Shares Fund, as well as in venture capital clean technology which in turn invests in technology and products providing solutions to environmental challenges. Our participation in this Climate Change Scenarios report has assisted our thinking in how to integrate climate change risk and opportunity into our investment strategy, and also in ways to access a robust and defensible methodology to assess the possible risk and return implications of climate change. We do this for the benefit of our more than 250,000 members.” Peter Lunt, Head of Investment Research, VicSuper

"That climate change poses significant financial and economic risks has only been accentuated by the tens of billions of dollars in losses due to recent climate related natural disasters such as the floods in Australia and Pakistan and the wildfires in Russia. This study makes a significant contribution to our ability to measure the level of risk that climate change creates for investment portfolios. Managing that risk in a way that maintains the returns expected by beneficiaries is a crucial responsibility for the management of these investment portfolios. This report provides some practical steps that investors can take today to shift their asset allocation to manage climate change risks and finance the much needed infrastructure for a lower carbon future."
Rachel Kyte, Vice President at IFC

"This report is unique and ground-breaking in quantifying the increased portfolio risk arising from global efforts to tackle climate change. It demonstrates that unless this risk is tackled intelligently by increasing exposure to green asset classes, then long term rewards will fall. The findings undermine any notion of a conflict between investing in green assets and acting in beneficiaries long term financial interests. This will have profound implications for fiduciary duties and places a clear obligation to increase analysis of the consequences of climate change for portfolio management."
Bruce Duguid, Head of Investor Engagement, Carbon Trust

ENDS

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