Cambridge Uni study says climate risk could cause rapid hit to investor portfolios of up to 45%

Much of risk may be unhedgable report suggests.

A study by Cambridge University says global investment portfolios could lose up to 45% of their value as a consequence of rapid shifts in societal and market climate change marke sentiment – contrary to received thinking that posits climate as a longer-term finance issue – in a report published by the University of Cambridge Institute for Sustainability Leadership (CISL).
The CISL brings together 11 large asset owners and fund managers with the mission to help shift the investment chain towards responsible, long-term value creation. Its report, titled: “Unhedgeable Risk: How climate change sentiment impacts investment” says financial markets may not be immune in the short term. The study was undertaken by the University of Cambridge’s Centre for Risk Studies (CRS), Centre for Climate Change Mitigation Research (4CMR) and the Judge Business School. It modelled the impact of three plausible sentiment scenarios against the 2 degrees warming target. It examined these against four different types of investment portfolios: high fixed income, conservative (60/40 bonds/equities), balanced (50/50) and aggressive (35/60 and 5% commodities). The report says the short-term market sentiment ‘tipping points’ could occur as a result of numerous factors, including climate change policy tightening, technological change, asset stranding, weather events and longer- term physical impacts, for which investors are not presently prepared.It says around half (53%) of the possible 45% portfolio drop would be ‘hedgeable’ if investments are reallocated effectively. But, significantly, it says the other half (47%) could effectively be ‘unhedgeable’, meaning that investors and asset owners would be exposed without system-wide action to address the underlying drivers of those risks. The CISL says until now no studies have quantified how changes in investor sentiment on climate change could impact financial markets in the short term.
As world leaders converge in Paris later this month for the UN’s latest COP21 round of climate negotiations, the study says that at the macro-economic level whether the world adopts a ‘Two Degree’ or ‘No Mitigation’ scenario there will be implications for investors. It says shifts in market sentiment cause global economic growth to reduce in both scenarios over a 5-10 year period as a result of economic adjustment. In the longer-term, however, the study shows that economic growth picks up most quickly along a low carbon pathway (Two Degrees), with annual growth rates of 3.5 per cent versus 2.0 per cent for the No Mitigation scenario.
The report calls for collaborative action from business, government and finance institutions to work together to ensure the economy moves onto a low carbon pathway.
Link to report