Major institutional investors have backed a study into the effects of climate change on investment portfolios, which predicts returns for the next 35 years.
Mercer, an investment consultancy that carried out the research, says investors need to factor climate change into their risk modeling because they “cannot ignore” the implications for investment returns.
However, this requires a significant behavioural shift, Mercer adds.
The report, called Investing in a time of climate change, outlines actions for investors to manage key downside risks and access opportunities in four scenarios where global temperatures rise above pre-industrial era temperatures.
A key finding is that, depending on the climate scenario which plays out, the average annual returns from the coal sub-sector could fall by anywhere between 18% and 74% over the next 35 years.
The effects over the coming decade will be more pronounced, eroding between 26% and 138% of average annual returns.
Conversely, the renewables sub-sector could see average annual returns increase by between 6% and 54% over a 35-year time horizon, or between 4% and 97% over a ten-year period.
Growth assets are more sensitive to climate risks than defensive assets.
A 2°C-increase scenario could see return benefits for emerging market equities, infrastructure, real estate, timber and agriculture. A 4°C scenario could negatively impact these assets.
Jane Ambachtsheer, chair of Mercer’s responsible investment team, says: “We recognise that markets do not always price in change; they are notoriously poor at anticipating incremental structural change and long-term downside risk until it is upon us.”
She adds that engaging with policy makers is also crucial and helps empower investors in their role as “future makers”.
US pension fund Calstrs, which represents teachers, and the Church of England National Investing Bodies are among the 16 investors with more than $1.5 trillion (€1.3 trillion) that have collaborated with Mercer.
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