According to a report released Feb. 15 by consulting firm Mercer, inaction and lack of cooperation surrounding climate change has the potential to cost institutional investors trillions of dollars over the next 20 years.
The report, Climate Change Scenarios – Implications for Strategic Asset Allocation, was a collaborative effort between Mercer and a group of global investors who represented approximately $2 trillion in assets under management. It analyzes, through four climate change scenarios that extend to 2030, the potential financial impact on investors’ portfolios, and then identifies a number of steps that can be taken through asset allocation to mitigate the risks.
In fact, the report says, increasing asset allocation to climate risk scenarios can even afford a reduction in portfolio risk, as well as opportunities to align institutional investors’ interests with both their beneficiaries and the need to tackle climate change mitigation and adaptation.
Key findings of the report indicate that, within 20 years, the following possibilities emerge:
- Uncertainty will increase for long-term institutional investors due to climate change; proactive management of that uncertainty will be needed
- Low-carbon technology investment opportunities could hit $5 trillion
- The impact on food security, the physical environment, and health could result in costs that exceed $4 trillion
- Carbon emission costs could rise by as much as $8 trillion due to climate change-related policy changes
- “Climate-sensitive” asset allocation increases will offer new opportunities as well as mitigating risk
- So that institutional investors can proactively manage potential costs of climate policy action that is delayed or poorly coordinated, it is vital that they interact with policy makers
- National-level developments in policy will offer new risks and investment opportunities that will need close monitoring
- Investment in low-carbon technology and improvements in efficiency will be led in the future by the EU and China/East Asia.
The Investor Network on Climate Risk (INCR), a network of 95 institutional investors across North America managing more than $9 trillion in assets, welcomed the report’s release. Mindy Lubber, president of Ceres and director of INCR, issued a statement that said, “Mercer’s report lends credence to a concern that the Investor Network on Climate Risk has been voicing for years. Climate change poses real costs and risks that are material to investment portfolios of pension funds and institutions around the world.”
The statement went on to say that no prudent investor could ignore either the portfolio performance risk, as high as 10%, or the potential rewards offered by low-carbon investment opportunities. However, Lubber warned, in order for regulators and policy makers to make the right investment decisions, they must have accurate information from companies; they must also, she added, put in place carbon-reducing policies that will allow investors to shift “large amounts of capital” away from polluting technologies and into low-carbon opportunities.