The downgrade was based on a best-case outcome that governments around the world can reduce carbon emissions and limit global warming, but Frontier has noted that economic and investment outcomes will be “much worse” if actions to limit temperature rises are unsuccessful.
In its update, Frontier said it rarely makes revisions, given the long-term nature of its outlooks. The change to its guidance is the first it has made based specifically on climate change.
“As a result of analysis, we have completed across a number of themes in this year’s review, we have lowered the likely returns we believe investors can expect, across all asset classes, by 0.25 per cent per annum,” Philip Naylor, principal consultant at Frontier Advisors said.
“The primary driver of this downward revision has been the long-term impact on the global economy of climate change.
“There are costs of transitioning to a low carbon economy, but the long-term costs of global warming and extreme weather events are far greater. There are a number of possible future scenarios with the degree of impact dependent on a range of different policy path responses policymakers make in the future.”
Frontier modelled a number of possible policy pathways and potential climate change impacts, including a more ambitious limiting of global warming to a two-degrees outcome and pledges made under the Paris Agreement.
The consultant focuses on four themes impacting its long-term assumptions for future returns: demographics, productivity and technology, inequality and climate change.
It also pointed to increasing regulatory pressure for investors to consider ESG factors in their decision-making.
