Quantifying the Cost of Climate Change

Failure of institutional investors to address climate change risks can reduce the value of their portfolios by as much as 10 percent in the next 20 years, according to a report supported by IFC.

The report is one of the first attempts to measure the impact of continued delays in climate change policy action and the lack of international coordination – an impact estimated to potentially cost institutional investors trillions of dollars over the coming decades. 

The report, Climate Change Scenarios: Implications for Strategic Asset Allocation, is a collaborative effort headed by Mercer and supported by IFC in partnership with Italy, Luxembourg, the Netherlands, and Norway. Other partners in the project were 14 global institutional investors representing around $2 trillion in assets under management, as well as The Carbon Trust. IFC supported the study by contributing technical expertise based on its experience working in emerging markets. 

“This study makes a significant contribution to our ability to measure the level of risk that climate change creates for investment portfolios," said Rachel Kyte, IFC Vice President for Business Advisory Services. "Managing that risk in a way that maintains the returns expected by beneficiaries is a crucial responsibility for the management of these investment portfolios.

"The report provides some practical steps that investors can take today to shift their asset allocation to manage climate-change risks and finance the much-needed infrastructure for a lower-carbon future.” 

According to the report, steps that investors can take today to begin the process of managing climate change risks include: introduce a climate risk assessment into ongoing investment strategic reviews; invest cleaner and greener to mitigate negative impacts of climate change; use sustainability-themed indices in passive portfolios; encourage fund managers to proactively consider and manage climate risks; and engage with companies to request improved disclosure on climate risks. Investors must also engage with policymakers on climate change issues to proactively manage these risks. 

Tackling climate change in developing countries is a strategic priority for IFC. IFC plans to double its climate-related investments to at least 20 percent of its overall commitments within two years. IFC Advisory Services spending on climate change is also expected to double to the same share over the same period.