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Climate Change and Asset Allocation

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For the most part it is widely acknowledged that climate change will have a broad-ranging impact on global economies and financial markets. The recently issued 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. Mercer suggests that 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.


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