Climate change has investment implications that could cost institutional investors trillions of dollars, according to a study by Mercer.
The research, conducted in conjunction with 14 leading global investors, revealed that trillions of dollars are at stake from climate change over next 20 years, thanks to continued delay in climate change policy action and lack of international coordination
“Climate change brings fundamental implications for investment patterns, risks and rewards,” said Andrew Kirton, chief investment officer at Mercer. “Institutional investors should be factoring long-term considerations, such as climate change, into their strategic planning.”
The report Climate Change Scenarios – Implications for Strategic Asset Allocation analyzes the potential financial impacts of climate change on investors’ portfolios, identified through a series of four climate change scenarios playing out to 2030.
Climate change matters to institutional investors because they will need to pay out pensions to their fund members well into the 21st century, said Howard Pearce, head of environmental finance and pension fund management, Environment Agency, one of the project partners. “We think all pension funds will need to adopt a climate change-proofed financial investment strategy in the future to enable them to fulfil their fiduciary duties.”
The report recommends a series of pragmatic measures for institutional investors to consider in their strategic asset allocation. A framework has been provided for institutional investors to enhance their understanding of climate-related investment risks and opportunities across asset classes and regions.
Some of the key findings show that by 2030:
- Climate change increases uncertainty for long-term institutional investors and needs to be pro-actively managed.
- Investment opportunities in low carbon technologies could reach $5 trillion.
- The cost of impacts on the physical environment, health and food security could exceed $4 trillion.
- Climate change related policy changes could increase the cost of carbon emissions by as much as $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.