In mid-February, Mercer, a global investment consulting firm, released a major report on climate change and its impact on investment portfolios. The report, titled “Climate Change Scenarios – Implications for Strategic Asset Allocation,” had been over a year in the making, and charted out the various ways that climate change could assert itself in institutional investors’ portfolios as both an investment risk (climate change policy could contribute as much as 10 percent to portfolio risk over the next 20 years, says the report) and an opportunity (the paper adds that investment opportunities in low-carbon technology could be as high a $5 trillion by 2030).
Overall, the report’s message was that institutional investors would be remiss to continue their business-as-usual approach to strategic asset allocation, which typically relies heavily on historical analysis and fails to take into account the types of possible paradigm shifts that climate change could bring. The report says: “Given the unclear climate policy environment and uncertainty around the full economic consequences of climate change, historic precedent is not an effective indicator of future performance.” The report goes on to detail how institutional investors can mitigate their climate change risks through fresh approaches to asset allocation.
Today, a coalition of three climate change-focused investor groups released a report (conducted by Mercer) that essentially asks, “So, investors, how are you doing with that?” The report contains the results of the first global survey coordinated by these investor networks – the European Institutional Investors Group on Climate Change (IIGCC), the North American Investor Network on Climate Risk (INCR) and Australia/New Zealand Investor Group on Climate Change (IGCC) – and is based on responses from 44 asset owners and 46 asset managers with collective assets totaling more than $12 trillion.
The survey’s results indicate that most respondents (98 percent of asset owners and 87 percent of asset managers) view climate change as a material investment risk/opportunity across their organization’s entire investment portfolio (it’s important to note here that this survey’s respondents were a self-selected group, and aren’t necessarily representative of the whole investment industry; as the report puts it: “Respondents to this survey are predominantly members of the investor networks on climate change and as such are likely to have higher levels of commitment than other investors”).
Still, respondents say there remain plenty of barriers to aligning their actual investment practices with their views on the materiality of climate change risks and opportunities. Investors cite a lack of data availability, uncertainties around climate change policy and the price of carbon, a lack of confidence in the materiality of climate change among portfolio managers, and a lack of experience in interpreting and analyzing data on climate change impacts as major challenges.
The U.S. emerges as the conspicuous regional laggard (compared to Europe and Australia) when it comes to integrating climate factors into their investment processes (for example, overall, 72 percent of asset managers and 70 percent of asset owners said that responsibility for climate change lies at the board level, rather than with specialist SRI teams, but among the smaller subset of North American respondents, the reverse is true – responsibility for anything to do with climate change lies with SRI teams the majority of the time). Not surprisingly, the report attributes this regional difference, at least in part, to the lack of a coherent climate change policy in the U.S. – the introduction of which, if the correlations within today’s report are any guide, will be a necessary step in bringing U.S. investment approaches toward climate change up to European levels of sophistication.
