{"id":42590,"date":"2015-06-08T00:15:58","date_gmt":"2015-06-07T22:15:58","guid":{"rendered":"http:\/\/beta.next-finance.net\/note\/climate-change-new-investment-risk-demands-action-by-investors-cautions-new-research\/"},"modified":"2015-06-08T00:15:58","modified_gmt":"2015-06-07T22:15:58","slug":"climate-change-new-investment-risk-demands-action-by-investors-cautions-new-research","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/note\/climate-change-new-investment-risk-demands-action-by-investors-cautions-new-research\/","title":{"rendered":"Climate change: new investment risk demands action by investors, cautions new research"},"content":{"rendered":"<p>The report, titled <em>\u201cInvesting in a time of climate change\u201d<\/em> outlines actions for investors to<br \/>\nmanage key downside risks and access opportunities. It is the culmination of a research<br \/>\nproject that began in September 2014 and will be launched in London today; ahead of<br \/>\nnegotiations for a new global climate agreement at the end of 2015 in Paris.<\/p>\n<p>The investment modelling in Mercer\u2019s report estimates the potential impact of climate change<br \/>\non returns for portfolios, asset classes and industry sectors between 2015 and 2050, based<br \/>\non four climate change scenarios and four climate risk factors. The four scenarios represent<br \/>\na rise in global temperature above pre-industrial era temperatures of 2\u00b0C, 3\u00b0C and two 4\u00b0C<br \/>\nscenarios (with different levels of potential physical impacts). <\/p>\n<p>Mercer collaborated with 16 investment partners, collectively responsible for more than<br \/>\nUS$1.5 trillion, to produce the report. It was supported by IFC, the private sector arm of the<br \/>\nWorld Bank Group, in partnership with Federal Ministry for Economic Cooperation and<br \/>\nDevelopment, Germany, and the UK Department for International Development (DFID). The<br \/>\nstudy was also supported with contributions from Mercer\u2019s sister companies NERA Economic<br \/>\nConsulting and Guy Carpenter, and input from 13 advisory group members. <\/p>\n<p>The investment modelling supports the following key findings:<\/p>\n<ul>\n<li> <strong>Climate change will give rise to investment winners and losers<\/strong><br \/>\n<br \/>Based on the scenarios modelled, climate change is expected to have an impact on<br \/>\ninvestment returns; investors need to take action to understand and mitigate the risks<br \/>\nand maximize value at the asset, industry sector and portfolio level.<\/li>\n<li> <strong>The biggest risk is at the industry level<\/strong><br \/>\n<br \/>Differentiation between winners and losers is most apparent at the industry level \u2013 For<br \/>\nexample, depending on the climate scenario which plays out, the average annual<br \/>\nreturns from the coal sub-sector could fall by anywhere between 18% and 74% over<br \/>\nthe next 35 years, with effects being more pronounced over the coming decade (eroding between 26% and 138% of average annual returns over the next 10 years).<br \/>\nConversely, the renewables sub-sector could see average annual returns increase by<br \/>\nbetween 6% and 54% over a 35 year time horizon (or between 4% and 97% over a<br \/>\n10-year period) depending on the climate scenario.<\/li>\n<li> <strong>Asset-class return impacts will be material, but vary widely by climate change scenario<\/strong><br \/>\n<br \/>Growth assets are more sensitive to climate risks than defensive assets.<br \/>\n<br \/>A 2\u00b0C scenario could see return benefits for emerging market equities, infrastructure,<br \/>\nreal estate, timber and agriculture. A 4\u00b0C scenario could negatively impact emerging<br \/>\nmarket equities, real estate, timber and agriculture.<\/li>\n<li> <strong>A 2\u00b0C scenario does not have negative return implications for long-term<br \/>\ndiversified investors at a total portfolio level over the period modelled (to 2050),<br \/>\nand is expected to better protect long-term returns beyond this timeframe. <\/strong> <\/li>\n<\/ul>\n<p>Chair of Mercer\u2019s Responsible Investment team, Jane Ambachtsheer, said, <em>\u201cWhilst it is<br \/>\nchallenging, we have attempted to quantify the potential investment impacts of climate<br \/>\nchange. We recognise that markets do not always price in change; they are notoriously poor<br \/>\nat anticipating incremental structural change and long-term downside risk until it is upon us.<br \/>\n<br \/>Our report identifies the \u2018what?\u2019 the \u2018so what?\u2019, and the \u2018now what?\u2019 in terms of the impact of<br \/>\nclimate change on investment returns. These insights enable investors to build resilience<br \/>\ninto their portfolios under an uncertain future.\u201c<\/em><\/p>\n<p><em>\u201cThis report can act as a guide to creating an action plan. Whether it is setting portfolio decarbonisation<br \/>\ntargets, investing in solutions that address risks and opportunities, or<br \/>\nincreasing engagement with managers and companies, our report shows investors how they<br \/>\nmight take action. Engaging with policy makers is also crucial and helps empower investors<br \/>\nin their role as \u2018future makers\u2019,\u201d<\/em> said Ms Ambachtsheer.<\/p>\n<p>Mercer\u2019s Global CIO for Mainstream Assets, Russell Clarke, added a portfolio construction<br \/>\nperspective, saying, <em>\u201cThis study helps us better prepare to navigate the changes that such a<br \/>\nstructural and systemic issue as climate change may represent. We believe it\u2019s a significant<br \/>\ninvestment risk that investors should be aware of and able to act upon in close collaboration<br \/>\nwith investment managers.\u201d<\/em><\/p>\n<p>IFC Director for Climate Change, Christian Grossman, commented, <em>\u201cThis new study led by<br \/>\nMercer could not be more timely on the road to the UN Climate Change conference in Paris.&#8221;<\/em><br \/>\n<em>&#8220;In a time of climate change, this study can help investors address uncertainty by guiding<br \/>\nthem on assessing their exposure to climate risk and improve the resilience of their portfolios. It can also send a clear message to policy-makers that resolving the uncertainty around the<br \/>\npolicy direction of carbon pricing will be an important first step toward transitioning to a low<br \/>\ncarbon economy,\u201d<\/em> said Mr Grossman.<\/p>\n<p>Other investment partners commented on their involvement in the project, as follows:<\/p>\n<p><em>\u201cInstitutional investors require actionable information to adequately reflect climate risks and<br \/>\nopportunities into asset allocation. While global warming is a fact, we face great uncertainty<br \/>\naround policy measures and the financial impacts in the nearer term are little understood.<br \/>\nThe Mercer study is an important step in channeling scientific and regulatory insights on<br \/>\nclimate change into the investment process and could become a standard toolbox for<br \/>\nthe strategic asset allocation.\u201d<\/em> &#8211; Karsten L\u00f6ffler, Managing Director,Allianz Climate Solutions GmbH.<\/p>\n<p><em>\u201cThe multi-scenario, forward-looking approach to this study makes it unique. Investors will be<br \/>\nable to consider allocation optimisation, based on the scenario they believe most probable, to<br \/>\nhelp mitigate risk and improve investment returns.\u201d<\/em> &#8211; Brian Rice, Portfolio Manager, CalSTRS.<\/p>\n<p><em>\u201cThe Church of England National Investing Bodies have adopted a climate change policy<br \/>\nwhich recognises climate change as an urgent ethical issue with important financial<br \/>\nimplications. In our policy we say that we want to be at the forefront of institutional investors<br \/>\naddressing the challenge of transition to a low carbon economy. Our participation in this<br \/>\nstudy has enabled us to grow our understanding of the investment implications of climate<br \/>\nchange and to consider ways in which, as investors working with others, we can help prevent<br \/>\ndangerous climate change occurring.\u201d<\/em> &#8211; Edward Mason,Head of Responsible Investment,Church Commissioners for England.<\/p>\n<p><em>&#8220;Cbus sees climate change as a significant issue for our investment portfolio over the longer<br \/>\nterm. We believe that participation in this study gives us insights into the range of impacts<br \/>\nthat climate change may have on our investments, and enable us to better prepare for the<br \/>\nclimate change-related challenges ahead.&#8221;<\/em> Kristian Fok, Executive Manager Investment Strategy, Cbus.<\/p>\n<p><em>\u201cAs a long-term investor, the Environment Agency Active Pension Fund recognises that<br \/>\nclimate change is a financially material risk. We have integrated the findings arising from the<br \/>\nprevious Mercer study in setting the Fund\u2019s current investment strategy, and participating in<br \/>\nthis update allows us to build on our existing approach to managing climate risk. By adopting<br \/>\na strategic asset allocation that is robust in incorporating both the risks and opportunities<br \/>\npresented by climate change, we will continue to act in the best long term interest of our<br \/>\nmembers.\u201d<\/em> &#8211; Dawn Turner,Head of Pension Fund Management,EAPF.<\/p>\n<p><em>&#8220;The results from the 2011 climate change study that we participated in showed that climate<br \/>\nchange may have large impacts on our investment portfolio. Therefore, we have participated<br \/>\nin the follow-up study to further develop our knowledge, our methods and our risk<br \/>\nmanagement regarding climate change.&#8221;<\/em> &#8211; Mikael Angberg,CIO, AP1.<\/p>\n<p><em>\u201cAs a long-term, intergenerational investor, we need to understand the investment risks and<br \/>\nopportunities associated with climate change. This study will help us calibrate our investment<br \/>\nstrategies accordingly.\u201d<\/em> &#8211; Adrian Orr, CEO, NZ Super.<\/p>\n<p><em>&#8220;State Super Financial Services recognises the importance of understanding climate change<br \/>\nrisks to our investment portfolios and we identified this study as an opportunity to meet this<br \/>\nobjective and further develop our broader ESG approach for our clients&#8217; benefit.&#8221;<\/em> &#8211; Jo Cornwell, Investment Specialist, State Super Financial Services.<\/p>\n<p><em>\u201cClimate change forces investors in the 21st Century to reconsider our understanding of<br \/>\neconomic and investment risk. This study provides the New York Common Retirement<br \/>\nFund with valuable insights that will inform our efforts to manage climate risk and build out<br \/>\nour portfolio in ways that protect and enhance investment returns.\u201d<\/em> &#8211; New York State Comptroller Thomas P. DiNapoli,Trustee of the New York State<br \/>\nCommon Retirement Fund.<\/p>\n<p><em>\u201cThis report highlights that investors should see the opportunities in addition to the risks from<br \/>\nclimate change. The tides are turning toward a low carbon future and away from the<br \/>\nunsustainable status quo. Investment is needed to accelerate this unavoidable trend and<br \/>\nthose who are ahead of this trend, the report shows, may in fact better secure their financial<br \/>\nfuture. It is now time for us to make sure that our investments are safe for the long term, safe<br \/>\nfinancially and safe for our precious planet.\u201d<\/em> &#8211; David Nussbaum, Chief Executive, WWF-UK.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A new report from Mercer modelling the potential impact of climate change on investments,<br \/>\nhas found investors cannot ignore the implications for investment returns. The research<br \/>\nreveals investors can manage the risk most effectively by looking \u2018under the hood\u2019 of their<br \/>\nportfolios and factoring climate change into their risk modelling, which requires a significant<br \/>\nbehavioral shift for most. <\/p>\n","protected":false},"author":20,"featured_media":42588,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1481],"tags":[1655,1826,1682,1651,1437,2159,1724,1650,2091,1685],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/42590"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=42590"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/42590\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/42588"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=42590"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=42590"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=42590"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}