Climate change forces new look at investor risk
Diversified investors should look to have 40 per cent of their portfolios in assets that are primed for the impacts of climate change, according to an advisory report to the investment industry.
The report, Climate Change Scenarios: Implications for Strategic Asset Allocation, was drafted by asset consultants Mercer, which advises big institutional investors, such as pension funds. Mercer concluded that climate change will force these highly diversified investors to re-balance their portfolios according to sources of risk, rather than the traditional approach purely according to asset classes.
Mercer says investors should bear in mind three areas of change: energy efficiency and technology; societal shifts, such as in health and food security; and shifts in policy, particularly in carbon emissions reduction.
In light of this, a range of “climate sensitive” areas were identified for returns and risk management potential emerging from the most likely climate change scenarios emerging over the next two decades. The report identifies listed shares, infrastructure and private equity as the best asset classes for investment in the recommended areas of timberland, renewable energy, energy efficiency and other sustainable assets. Investment opportunities in low-carbon technology could be as high as $5 trillion by 2030, the report states.
The report warns that weather extremes expected in a warming world, such as drought, floods and storms, could contribute 10 per to portfolio risk by 2030. But investors must not only take account of environmental damage, but anticipate policy changes designed to tackle the climate problem.
In the most likely of four global policy settings to emerge by 2030, action on climate change would be in place on a regionally divergent basis with some nations taking stronger measures to cut emissions than others, but no more than medium ambition overall. A carbon price of $110 per tonne could be expected in this scenario by 2030, the report says.
360investgroup
News source : Carbon Positive
