Mercer says global institutional investors starting to address climate risk

Consultant’s follow-up to groundbreaking 2011 climate change research

Major global institutional investors have started to address climate change risk via asset allocation and other means, according to consulting firm Mercer.

The firm has released a follow-up survey of its blockbuster 2011 report on institutional climate change investment. That report – Climate Change Scenarios – advocated a massive shift by institutional investors into climate sensitive assets.
Now Mercer has surveyed the investors who had partnered with it on the report to see how they have responded. It has released a new 23-page report called ‘Through the Looking Glass: How Investors are applying the Results of the Climate Change Scenarios Study’.

Mercer has found that more than half of them have taken or are planning action based on the report’s findings. Among the 12 investors surveyed, representing almost $2trn in assets, more than half have decided to include climate change considerations in future risk management and/or strategic asset allocation processes. And 50% have undertaken or plan to make changes to their actual asset allocations.

In addition, 80% of them have or will increase their engagement with companies and policy makers on climate change.

Mercer said that a third of the investors have begun to or plan to allocate more to “climate sensitive assets”. These are identified as real estate, infrastructure, private equity, sustainable equities, efficiency/renewables and commodities (such as agricultural land and timberland).

The survey has been released as part of the Investor Network on Climate Risk meeting taking place this week in New York.“We are encouraged to see that partners have clearly made efforts to understand and act on the findings from our climate change report,” said Jane Ambachtsheer, Mercer’s Global Head of Responsible Investment.

Participant investor CalPERS, the California Public Employees Retirement System, has identified climate change as a priority and its implementing actions in line with the Mercer study, said Anne Simpson, the fund’s Senior Portfolio Manager for Corporate Governance.

AP1, the Swedish state fund, said the Mercer report had strengthened its conviction of the need to increase the share of real assets in its portfolio such as real estate, agricultural land, timberland and infrastructure. It said: “The analytical approach that was applied in the study will be incorporated into the strategic reviews that AP1 uses to determine its long-term investment orientation.”

The Environment Agency Active Pension Fund said it was currently researching additional exposure to climate sensitive assets such as timber, sustainable infrastructure and green bonds.

AustralianSuper said it had reviewed the climate change risks across its portfolio, including equities, property and infrastructure.

Mercer said there is an opportunity for new investment vehicles to be developed to get more money allocated to climate sensitive assets. The stage has been set, it says, to explore alternative investment structures.

Large investors “have the capacity to create new entities to effectively deploy assets as necessary to fund (and profit from) a transition to a lower carbon economy”.

This warrants “a broader, more comprehensive review,” the firm said.