Investors are increasingly re-examining how they identify and manage risk. This involves articulating an investment time horizon — often multi-decade — and then defining which risks warrant consideration beyond standard measures such as market volatility. How could economic, environmental, technological, societal, and geopolitical issues impact the ability to meet return objectives? What steps can be taken to mitigate risks or capture opportunities accordingly?
Within this context, climate change deserves special focus, given its potential impact and the narrow time frame that’s left to address it. Over 2014-2015, Mercer led an in-depth collaborative study with 16 investors in order to answer three critical questions. Every investor must be prepared to answer these questions if we are to effectively tackle climate change risks and capitalise on associated opportunities:
1. How big a risk/return impact could climate change have on our portfolio?
2. What are the key risks and opportunities?
3. What plan of action can ensure portfolio resilience?
The study findings are presented in the ‘Investing in a Time of Climate Change’ report, which, together with our associated climate risk framework, considers four climate scenarios and four climate risk factors to estimate the climate impact on potential returns. Download a summary of the report at right and ask yourself, as a long-term investor, are you aware of your climate change risk exposure?
Four Key Findings
The four key findings of our Investing in a Time of Climate Change report suggest that anticipating and preparing for the impact of climate change on investment returns should be an integral part of the investment process.
1. Climate change will have an impact regardless of the scenario.
2. Potential sector impacts are most meaningful - particularly over the next 10 years to 2025.
3. Asset class impacts can also be material - and vary by climate scenario.
4. A 2oC (Transformation) scenario need not harm total diversified portfolio returns out to 2050.
A couple of months after our report was launched in mid-2015, an article in The New Yorker magazine called it “the most comprehensive from an asset-allocation perspective” to date. As we intended, it’s a report that made a contribution to The 21st UN Climate Change ‘Conference of the Parties’ (COP21), which concluded with an historic agreement that US President Barack Obama said provided "the best chance we have to save the one planet we have". In the lead up to and during COP 21, our report was referenced by Prince Charles, Bank of England Governor Mark Carney and Lord Bourne (UK Parliamentary Under Secretary of State for Climate Change).
The report describes the:
- Key motivation for investor action.
- Risk factors.
- Asset Sensitivity.
- Portfolio implications and investor actions.
Appendices offer insights into the climate models that are the basis of the study, and more detail on the four future scenarios.
Mercer can help you overlay these findings on your own investment portfolio to identify the specific implications for you.