When the giant investment firms understand that global warming is a real problem, the rest of us should really stop thinking global warming is some sort of communist plot. The capitalists are worried about global warming too. In fact they think they can make a lot of money by dealing with the problem. They also think they can save a lot of money by dealing with the problem before it becomes too big.

It would seem that the only people who think global warming is a scam are the industries that are set to lose the most, coal, oil and gas companies.

• Climate change could contribute as much as 10% to portfolio risk over the next 20 years
• Investors could benefit from increased allocation to infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets
• Investment opportunities in low carbon technology could be as high as $5 trillion by 2030
• Institutional investors have numerous options for capitalizing on opportunities and managing risks arising from climate change

See a summary video here.

Continued delay in climate change policy action and lack of international coordination could cost institutional investors trillions of dollars over the coming decades, according to research released by Mercer and a group of leading global investors representing around $2 trillion in assets under management¹.

Andrew Kirton, Chief Investment Officer at Mercer, commented: “Climate change brings fundamental implications for investment patterns, risks and rewards. Institutional investors should be factoring long-term considerations, such as climate change, into their strategic planning. Mercer is pleased to have had the opportunity to kick start such strategic discussions with a group of leading global investors.”

The report Climate Change Scenarios – Implications for Strategic Asset Allocation analysis the potential financial impacts of climate change on investors’ portfolios, identified through a series of four climate change scenarios playing out to 2030. The report identifies a series of pragmatic steps for institutional investors to consider in their strategic asset allocation.

In the report, a framework is outlined that can be used by institutional investors to enhance their understanding of climate-related investment risks and opportunities across asset classes and regions. Mercer’s “TIP Framework” estimates the rate of investment into low carbon technologies (T), the impacts (I) on the physical environment and the implied cost of carbon resulting from global policy (P) developments across the four climate scenarios. 

Some of the key findings show that by 2030:

• Climate change increases uncertainty for long term institutional investors and as such, needs to be pro-actively managed.
• Investment opportunities in low carbon technologies could reach $5 trillion.
• The cost of impacts on the physical environment, health and food security could exceed $4 trillion.
• Climate change related policy changes could increase the cost of carbon emissions by as much as $8 trillion.
• Increasing allocation to “climate sensitive” assets will help to mitigate risks and capture new opportunities.
• Engagement with policy makers is crucial for institutional investors to pro-actively manage the potential costs of delayed and poorly coordinated climate policy action.
• Policy developments at the country level will produce new investment opportunities as well as risks that need to be constantly monitored.
• The EU and China/East Asia are set to lead investment in low carbon technology and efficiency improvements over the coming decades.

The launch of the report and the Mercer TIP Framework represents a collaborative endeavor led by Mercer which involved 14 global institutional investors, and was supported by the International Finance Corporation, a member of the World Bank Group, and Carbon Trust. Grantham LSE/Vivid Economics were engaged to lead components of the research on the economic impacts of climate change scenarios and a research group comprised of industry practitioners and academics was consulted in the development of the model.

Footnotes

1 Whilst the UN climate change talks in Cancun produced some agreement on reforms that failed to materialize during preceding discussions at Copenhagen, the absence to the future of market based mechanisms post 2012 when the Kyoto Protocol expires creates a cloud of uncertainty over investors’ heads.