Climate change will give rise to investment winners and losers, but keeping global temperature rises below 2 degrees will not have a negative overall effect on returns for long-term diversified investors out to 2050, and should protect longer-term returns beyond that, according to the update of a major report by Mercer, the investment consultant. Despite the strategic investment importance of climate change according to the consultant’s findings, a lack of asset manager responses to the report had been “eye-opening”, one of Mercer’s principal investment advisors said at its launch.
The report, Investing In A Time Of Climate Change is the second by Mercer looking at the danger of climate risk for investors. It first explored the issue in 2011. Its investment modelling estimates the potential impact on returns for portfolios, asset classes and industry sectors between 2015 and 2050, based on four scenarios and four climate risk factors. It says the biggest risk is at industry level where asset-class return impacts will be material, but vary widely by climate change scenario – a 2 degrees rise could see return benefits for emerging market equities, infrastructure, real estate, timber and agriculture.
The report recommends that investors can manage the risk most effectively by looking ‘under the hood’ of their portfolios and factoring climate change into their risk modelling, requiring a significant behavioural shift.
However, Vanessa Hodge, principal investment consultant at Mercer, said it had contacted 50 funds houses for research for the report, particularly into the cost of carbon built into their future company assessments, but only 6 responded: “It was eye-opening in itself. There is an opportunity for the investment community to do more.”The latest study was conducted in collaboration with 16 leading global investors, with support from the International Finance Corporation, the Federal Ministry for Economic Cooperation and Development, the Department for Energy & Climate Change and the Department for International Development.
Jane Ambachtsheer, Chair of Mercer’s Responsible Investment Team, said: “This report can act as a guide to creating an action plan. Whether it is setting portfolio decarbonisation targets, investing in solutions that address risks and opportunities, or increasing engagement with managers and companies, our report shows investors how they might take action. Engaging with policy makers is also crucial.” Analysing the challenge for asset owners to address the risk of climate change, Ambachtsheer noted a World Economic Forum Global Risk Report which found that the biggest economic risks over the next ten years were issues like climate, food, water, but that these issues weren’t risks in the next 18 months: “It’s a challenge to manage long-term risk when you have short-term priorities,” she said. “We need to try and build a bridge between the two time zones.”
The report has also highlighted that climate risk will be sensitive to different industries, either positively or negatively. Ambachtsheer said it could lead to a “meaningful change in how investment committees oversee climate risk”, and could lead to a shift in investment benchmarks.
Investors who were involved in the Mercer study said they would use the findings in the report to analyse their portfolios for climate risk.
Mikael Angberg, Chief Investment Officer at AP1, the Swedish government pensions buffer fund, said it “participated in the follow-up study to further develop our knowledge, our methods and our risk management regarding climate change.”
A panel discussion at the report launch heard from
Faith Ward, chief responsible investment and risk officer at the Environment Agency Pension Fund; Edward Mason, head of responsible investment, Church Commissioners for England, and Michelle O’Keeffe, governance analyst, Baillie Gifford.
Mason said that there would need to be a culture shift in the asset management industry: “They are used to thinking short term, and not thinking at a “future maker” level. There will be discomfort in making change, but a shift is needed.” He said a shift was already happening in the asset owner industry, highlighting the Aiming for A investor coalition, where investors filed and won rare shareholder resolutions at BP and Shell on the issue of climate change reporting.
Ward said if fund managers didn’t engage with companies on climate they wouldn’t be selected by the fund.
O’Keeffe said it was good that the report demonstrated that transition to a low-carbon economy would not be punitive for investors: “It fits with our thinking around opportunity upsides in a low carbon transition if you find them.”Donald MacDonald, IIGCC chairman and trustee director of the BT Pension Scheme said the report would be more influential than its predecessor in 2011: The issue is moving centre stage and becoming mainstream and it is our responsibility to get the message out to the rest of the investor community.” Mercer plans to publish further reports on the issue looking at subjects such as more extreme scenarios and what it will take for the investor community to be more effective future makers.
Investors involved in backing the report’s research included Allianz Climate Solutions GmbH; Baillie Gifford & Company; BBC Pension Trust; British Telecom Pension Scheme UK; Church of England National Investing Bodies; The California State Teachers’ Retirement System; Construction and Building Industry Super; Connecticut Pension Fund; Credit Suisse; The Environment Agency Pension Fund; AP1; Guardians of New Zealand Superannuation Fund; The New York State Common Retirement Fund; Queensland Investment Corporation Limited; State Super Financial Services and WWWF-UK.
The report had an advisory group including Sean Kidney from the Climate Bonds Initiative, Bob Litterman from the Asset Owners Disclosure Project and Nick Robins of the UN Environment Programme.