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Portfolio > Asset Managers

International Climate Change Asset Allocation Study Launched

By Bob Keane

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While in some circles there is still debate about the genesis of climate change, for the most part it is widely acknowledged that climate change will have a broad-ranging impact on global economies and financial markets. The recent SEC guidance on climate change disclosure is but one example of how this issue will need to be taken into account by investors.

To help address how institutional investors can best prepare for the challenges presented by climate change, both from a risk and return perspective, Mercer, the global consulting firm, together with 14 institutional asset owners and investors from around the world, including CalPERS, CalSTRS, and the Maryland State Retirement and Pension System, as well as the U.K.’s Carbon Trust, and IFC (a member of the World Bank Group) have launched a strategic asset allocation study to explore the potential impact of climate change scenarios on asset allocation.

The study uses a scenario-based framework to identify potential new investment opportunities and possible future risks. It will consider a variety of climate change scenarios and map the potential risks and opportunities of these outcomes for returns on asset classes in different regions over the periods until 2030 and 2050. The research will explore volatility and correlations among asset classes, regions, and sectors under each scenario and consider each scenario’s impact on strategic asset allocation.

A report on the study is expected to be available to the public in the fourth quarter of this year. Each study partner will also receive their own tailored report assessing the effects of the scenarios on its particular asset mix, highlighting both the investment risks and opportunities.

Mercer indicates that the release of the study findings should encourage financial intermediaries such as asset managers and advisors to develop tools, products, and services that facilitate appropriate responses to climate risk scenarios.

The report will also consider recommendations for policy-makers and industry bodies. Although financing arrangements did not feature prominently during the December 2009 Copenhagen Summit on climate change discussions, they will be crucial for mobilizing capital to help meet government targets to reduce emissions and provide the funding required for adaptation to the physical impacts of climate change. “The importance of private sector capital cannot be understated in the fight against climate change. Yet mobilizing those funds requires clear understanding of the climate risks and opportunities to help pension funds allocate capital appropriately,” said Greg Radford, IFC director for Environment and Social Development, in a release announcing the study.

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