New research from PGIM surveying 100 institutional investors has confirmed nearly 90 per cent of investors believe climate change is a very or somewhat important risk.
Taimur Hyat, chief operating officer at PGIM commented COVID-19 had revealed investors are vulnerable to “slow-burning risks with unpredictable timing”.
Markets have only just begun to reflect climate risks in asset prices, the research further noted, with PGIM forecasting that a range of catalysts, including a transition towards a low-carbon economy, are set to accelerate their repricing to consider physical and transition risks.
“Climate change is the next crisis that will radically reshape investors’ risks and opportunities,” Mr Hyat said.
“Investors that take action now can play an influential role in driving the global transition to a low-carbon economy while optimising their portfolios for a greener future.”
But PGIM expects savvy investors may be able to pick opportunities where others claim the risk is too high.
The fund manager forecast the evolution away from fossil fuels will play over a longer time frame than many might expect – commenting investors may be able to influence fossil fuel users and extractors in the meantime. Property is also expected to present opportunities where the broader market might see limited value.
PGIM has also forecast that investors may need to apply a climate change lens to sovereign debt. Around 25 per cent of investors indicated they view climate as a risk for sovereign debt, while only 4 per cent see it as an opportunity.
But investors should look beyond the obvious physical risks within their portfolios, the report noted, with other potential vulnerabilities lying in supply chains and industries not typically considered as having high exposure to climate change, such as semiconductors and pharmaceuticals.
Less than one in five investors were found to use alternative data such as satellite imagery, flooding maps, drought data and air quality data, to better understand cross-portfolio climate risk.
