Climate change risk to institutional investors could be trillions of dollars

A report published today by Mercer and a group of leading global investors concludes that continuing to delay on climate change policy action and a lack of international coordination could cost institutional investors trillions of dollars. Failure to factor climate change into a long term investment strategy could result in both losses and missed opportunities.

The report titled Climate Change Scenarios – Implications for Strategic Asset Allocation looks at the potential financial impact of climate change scenarios on institutional investors portfolios. It uses four climate scenarios which run up to 2030 as the data models and then seeks to identify steps that investors can take to be more strategic with their investment portfolio asset allocation.

Some of the key findings from the report show that by the year 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 co-ordinated 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.

One of the relevant findings from the report for investors in insurance-linked securities and catastrophe bonds is that in order to manage climate change risks across a portfolio the report recommends that investors will need to think about diversification across sources of risk rather than across asset class as is more traditional. This concept will already be very familiar to ILS investors who diversify their cat bond portfolio across multiple types of peril. Perhaps this suggests that investors who have already been involved in the insurance-linked securities market may be a little more savvy about climate risk than investors who haven’t?

It’s a very comprehensive report and worth taking the time to read it. You can access the report and various supplementary documents here.