Investors are being urged to take action in response to the impact on returns posed by climate change, as New York-based pensions and investment consultancy Mercer releases its latest report on the matter.
According to the report, “the implications of climate change are systemic and are already apparent”. It highlights how increasingly frequent “extraordinary weather events” are already having “significant financial and human consequences”.
Mercer is pushing for solutions. Its second and latest climate change report outlines both short and long term actions investors can take in order to mitigate risks and access opportunities.
It is a timely moment to do so, as regulatory pressure on asset owners to consider climate risk is increasing. Investment regulations set out by the Department of Work and Pensions will come into force in the UK this October.
These will require pension scheme trustees to include in their statement of investment principles what their financially material considerations are, including environmental, social and governance (ESG) factors, and explicitly climate change.
Entitled Investing in a time of climate change – the sequel, the report takes into account three climate change scenarios – “a 2°C, 3°C and 4°C average warming increase on preindustrial levels, over three timeframes – 2030, 2050 and 2100”. This is a longer timeframe than Mercer’s 2015 climate change report which was modelled up until 2050.
According to Mercer, this “provides greater visibility into the expected impacts of natural catastrophes and resource availability for each temperature increase.”
The report also incorporates a stress-testing addition to the model allowing investors to assess “how a sudden change in view on the likelihood of a scenario, market awareness (how much climate risk is priced in by the markets) and/or environmental damages could impact investment returns in the near term.”
Mercer’s global business leader of responsible investment, Helga Birgden, said that a principal conclusion of the report is that “investing for a 2°C scenario is both an imperative and an opportunity”.
“It’s an imperative, since for nearly all asset classes, regions and timeframes, a 2°C scenario leads to enhanced projected returns versus 3°C or 4°C and therefore a better outcome for investors,” she said.
Birgden highlighted that there are “many notable investment opportunities enabled in a low-carbon transition,” even though “incumbent industries can suffer losses in a 2°C scenario”.
“The modelling shows that greater inclusion of sustainable assets into portfolios can enhance returns. The evidence is compelling and reinforces the findings made in Mercer’s 2015 climate change report, supporting greater urgency for action to achieve a well-below 2°C scenario,” she added.
The report emphasizes that “humans have never lived in a world much warmer than today,” saying that investors should act duly.
“Investors need to consider both climate-related mitigation and adaptation in an active way
to develop climate resilience in their portfolios,” it says.
“Financial regulators, particularly for pension funds, are increasingly reinforcing this message by formalizing the expectation that investors should consider the materiality of climate-related risks and manage them accordingly, consistent with their fiduciary duties.”
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