Report Shows Climate Change Poses Up to 10% of Portfolio Risk Over Next 20 Years

(February 15, 2011) — Climate change could contribute as much as 10% to portfolio risk over the next 20 years, according to a report by Mercer.

“Climate change brings fundamental implications for investment patterns, risks and rewards,” Andrew Kirton, Chief Investment Officer at Mercer, commented in a statement. “Institutional investors should be factoring long-term considerations, such as climate change, into their strategic planning. Mercer is pleased to have had the opportunity to kick start such strategic discussions with a group of leading global investors.”

The study — titled Climate Change Scenarios – Implications for Strategic Asset Allocation — asserts that institutional investors could lose trillions of dollars over the coming decades as a result of “continued delay in climate change policy action and lack of international coordination.” Opportunities, the report says, lie in an increased allocation to infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets, with investment opportunities in low carbon technology reaching up to $5 trillion by 2030. Meanwhile, the report outlines the consultancy’s “TIP Framework,” which provides estimations on the rate of investment into low carbon technologies (T), the impacts (I) on the physical environment, and the implied cost of carbon resulting from global policy (P) developments across the four climate scenarios.

The launch of the study reflects an effort headed by Mercer that involved 14 global institutional investors as well as support from the International Finance Corporation, a member of the World Bank Group, and Carbon Trust. The collaboration also highlights the influence among institutional investors in combating the economic impacts of climate change.

Joe Dear, CIO of the California Public Employees Retirement System (CalPERS), stated that: “CalPERS has been a leading advocate for environmental and climate change issues for many years and recognizes these to be key risks for long term investors. This opportunity to collaborate with institutional investors from around the world to look at the impact of climate change scenarios on investments helps us to shape our strategic thinking in this area and better integrate our programs, policies and risk management.” In November 2010, for example, CalPERS, America’s largest public pension fund, said it aimed to invest $500 million in a ‘green’ portfolio in an effort to limit greenhouse-gas emissions and improve the environment. The investment was in addition to about $2 billion CalPERS has committed to green-related investments in the past four years.

In September of last year, a group of institutional investors, with approximately $558 billion in assets under management,   pushed global listing authorities and stock exchanges to demand that sustainability reporting become a part of their listing rules. According to a statement by Aviva Investors, this coalition of investors aimed to write to the CEOs of stock exchanges to make their demands, part of an engagement initiative launched by Aviva Investors and facilitated by the UN-backed Principles for Responsible Investment (PRI) in 2009. The mission of the group is to encourage a global listing environment that requires companies to become more mindful of a sustainability strategy.

“We…believe that stock exchanges can play a crucial role in helping to create more sustainable global capital markets because of their ability to directly influence and monitor the operations and strategy of companies seeking to access the equity markets. We are sending a strong signal that, all things being equal, Aviva Investors would prefer to trade on stock exchanges that maintained this listing provision,” said Paul Abberley, CEO of Aviva Investors London, in a statement.

Separately, the   Institutional Investors Group on Climate Change (IIGCC) has outlined a list of guidelines to help pensions understand climate-related risks and opportunities in their portfolios. A report released in June by the IIGCC revealed that twice as many investors are asking stock and bond managers about their global-warming policies compared to two years earlier. However, integration of these policies into investment mandates has been slow to take hold.

“The fact that asset owners now question their asset managers about their climate change policies prior to making a selection is a clear signal of increased awareness on climate change in the investment community,” said Ole Beier Sørensen, the new chairman of IIGCC. “This progress will be further strengthened if attention to climate change is applied throughout the decision‐making process, from investment manager selection to Investment Manager Agreements.”

The London-based Institutional Investors Group on Climate Change has around 58 members who manage about 5 trillion euros ($6 trillion).