Climate change is set to wreak havoc on institutional portfolios, with the coal sub-sector alone likely to fall between 18 and 74 per cent by 2050, warns Mercer.
Global consultant Mercer has collaborated with 16 investment partners to model the impact of climate change on institutional investments over the next 35 years.
The report, titled Investing in a time of climate change, urges asset owners to develop a framework to tackle the effect of climate change on their portfolio.
Mercer laid out four scenarios based on research and collaboration with its project partners: a two-degree warming above pre-industrial era temperatures by 2050; a three-degree warming; and two scenarios with a four-degree warming (one with lower economic damages and one with higher damages).
While there are obvious risks to portfolios when it comes to the coal sub-sectors (with average annual returns predicted to fall between 18 and 74 per cent), there are also opportunities for investors in the renewable energy sector, Mercer said.
“The renewables sub-sector could see average annual returns increase by between 6 per cent and 54 per cent over a 35-year time horizon (or between 4 per cent and 97 per cent over a 10-year period) depending on the climate scenario,” the report said.
Speaking to InvestorDaily, Mercer global business partner for responsible investment Helga Birgden said climate change will inevitably have an impact on investment returns and return variability.
“The scenarios we’ve come up with have come out of understanding and studying the latest climate models, the latest science, the latest economic data as well as expert input as well as findings from the industry and literature,” Ms Birgden said.
The new Mercer report is the only report that looks at the impact of climate change on institutional portfolios, she said.
“Our key finding is that investors need to look under the hood and look at the detail and that’s where the story is most evident,” Ms Birgden said.
Divestment from coal is just one option asset owners may choose to take.
“We see a lot of opportunities in this report so we’re talking about first of all starting with understanding carbon exposure. Investors are taking a measure of their carbon footprint and understanding what they’re exposed to,” Ms Birgden said.
“They’re looking at the reduction of carbon, and some investors are reducing their carbon exposure by establishing targets. Other investors are investing for climate change by allocating to sustainable investments,” she said.
Ms Birgden said she hoped investors would adopt a framework for integrating climate change as an investment risk – and as a way of making a portfolio more resilient.
“We’ve put forward a process that we think is applicable to investors – which is the sustainable growth framework,” she said.
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