Continued delay in climate change policy action and a 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 management.

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

According to the report, climate change could contribute as much as 10% to portfolio risk over the next 20 years. However, investors could benefit from increased allocation to infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets.

Some of the key findings showed that by 2030, the cost of impacts on the physical environment, health and food security could exceed $4 trillion, while climate change related policy changes could increase the cost of carbon emissions by as much as $8 trillion.

However, increasing allocation to ‘climate sensitive’ assets will help to mitigate risks and capture new opportunities. According to the report, investment opportunities in low carbon technologies could reach $5 trillion by 2030. But although policy developments at country level will produce new opportunities, they will also create risks that need to be constantly monitored. The report stated that the EU and China/East Asia are set to lead investment in low carbon technology and efficiency improvements over the coming decades.

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.

Rachel Kyte, vice president of IFC, one of the project partners, said: "That climate change poses significant financial and economic risks has only been accentuated by the tens of billions of dollars in losses due to recent climate related natural disasters such as the floods in Australia and Pakistan and the wildfires in Russia. This study makes a significant contribution to our ability to measure the level of risk that climate change creates for investment portfolios."

Howard Pearce, head of environmental finance and pension fund management at Environment Agency, another of the 14 project partners, commented: "Why does climate change matter to institutional investors like us? It matters because we know that we will need to be paying out pensions to our fund members well into the 21st century. We think all pension funds will need to adopt a climate change-proofed financial investment strategy in the future to enable them to fulfil their fiduciary duties."

Paul Ruscoe, sales director of Carbon Footprint Investments, welcomed this latest report on climate change. “It very much underlines the growing feeling that the trustees have the fiduciary responsibility to take climate change into account with their investment strategy. So when we start to see the combination of more voices underlining these issues, then people will start to be compelled to take more action.”

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