Investors can no longer bypass implications posed by the changing climate on their portfolios, says the new report --“Investing in a time of climate change,” led by Mercer and supported by IFC, in partnership with the Federal Ministry for Economic Cooperation and Development, Germany and the UK Department for International Development (DFID).
This update to a 2011 estimates the impact of climate change on returns to demonstrate why climate-related risk factors should be standard considerations for investors, as the majority of investors are not incorporating climate considerations into their portfolio decisions.
The study warns the investors not to expect that the future will mirror the past, particularly at a time when economic growth is heavily reliant on an energy sector powered by fossil fuels. It shows that impact on returns from climate change are inevitable – irrespective of which climate scenario -- 2 or 4 degree -- unfolds. The new research also points to opportunities for investors in an economy that would transition to a 2 degree low carbon scenario, laying out the fact that this scenario would not jeopardize financial returns for long-term diversified investors.
Climate change will give rise to investment winners and losers, with the energy sector becoming the most impacted: the coal industry will be the biggest loser while the renewable sector will win. Depending on the climate scenario which plays out, the average annual returns from the coal sub-sector could fall by 26 percent to 138 percent over the next 10 years. Conversely, the average annual returns in the renewables sub-sector could increase by between 4 percent and 97 percent over the next 10 years.
The report assesses investment exposure to climate risk, estimates the impact on investment returns through to 2050 and offers insights on how investors can improve the resilience of investment portfolio in a time of climate change.
The research was conducted as a global collaboration, led by Mercer, with input from 16 asset owners and asset managers (four in US, four in Australia/New Zealand and eight in Europe), representing more than $1.5 trillion in assets under management.
Download the full study here