In light of the growing economic risks climate change poses, investors are increasingly interested in understanding the opportunities and threats climate change poses to the financial performance of the portfolios they manage. In 2015, the global consulting firm Mercer collaborated with 16 large investors, collectively responsible for $1.5 trillion in assets, to produce Investing in a Time of Climate Change to address climate change’s risk/return impact; the key downside risks and upside opportunities; and planning for resilience to climate change. The research reveals investors can manage the risk most effectively by looking ‘under the hood’ of their portfolios and factoring climate change into their risk modelling, which requires a significant behavioral shift for most investors.
Mercer’s investment modelling estimates the potential impact of climate change on returns for portfolios, asset classes, and industry sectors between 2015 and 2050, based on four climate change scenarios and four climate risk factors. The four scenarios represent a rise in global temperature above pre-industrial era temperatures of 2°C, 3°C and two 4°C scenarios, with different levels of potential physical impacts. Mercer recommends that investors develop climate-related investment beliefs along with their other investment assumptions. The report also notes that investors can use the important lever of engagement with their investment manager to demand awareness of climate change risk strategies, as well as with policymakers to shape laws and regulations to encourage mitigating climate change’s worst impacts.
To download Mercer’s report, click here.
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