Long-Term Positioning for Environmental Risks

hurricane trailerI work at Oxford University’s School of Geography and the Environment. I also work at Stanford University’s School of Civil and Environmental Engineering. I co-founded the environmental club at my high school. (We started the school’s recycling program, cleaned up a few local beaches and sold some T-shirts with endangered animals on the front; high-impact stuff.) So think I know a thing or two about environmental issues. I don’t drive a Prius, but I’m kinda legit on the eco-front.

As such, I think I am within my abilities to say that the views expressed by a certain SWF boss this week about the role of carbon dioxide in climate change probably would not be characterized as ‘mainstream’. (In fact, I received a few emails that characterized this person’s views in far more colorful terms, but since this is a family show I’ll spare you the details).

Now, everybody’s got a right to his or her opinion. And I have no interest in getting into a debate about carbon’s role in climate change. But this individual’s comments do actually present a nice opportunity to talk through how other bosses of institutional investors are thinking about carbon, climate change and how they might position their funds to manage the associated risks over the long term. And, coincidentally, a small group of fringe institutional investors got together earlier this year to explicitly examine carbon and climate change and its implications for their funds’ long-term strategic asset allocation.

Sorry, did I say small and fringe? I meant to say the biggest funds in the world; the group consisted of APG, AP1, CalPERS, CalSTRS, GIC, GPF-G, OMERS, OzSuper, PGGM…you get the idea. These heavyweights got together with Mercer under the assumption that, in the words of Nicholas Stern, they were facing “the greatest market failure the world has seen.” And, lucky for us, this group published a report outlining their findings entitled “Climate Change Scenarios – Implications for Strategic Asset Allocation.” (Here’s a direct link to the PDF.) And here’s a blurb:

“It is widely acknowledged that climate change will have a broad-ranging impact on economies and financial markets over the coming decades. This report analyses the extent of that impact on institutional investment portfolios and identifies a series of pragmatic steps for institutional investors to consider, including allocation to climate-sensitive assets and the adoption of an “early warning” risk management process.”

Personally, I thought this was a really interesting and insightful report. It goes through asset class by asset class and talks about the risks and potential impacts on investment returns from climate change. In other words, it’s written for investment professionals by investment professionals. I think it’ll make perfect reading for a hot summer weekend…(click image to enlarge)

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This post originally appeared on the Oxford SWF Project