The FINANCIAL — A new study released on June 4 by IFC, a member of the World Bank Group, and Mercer shows that implications of climate change pose serious risks for investors and that integrating climate risks into investment strategies can help with investor return outcomes due to greater awareness of exposure to climate -sensitive sectors and asset classes.
The study, “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), is an update to a 2011 report. Climate Change Scenarios – Implications for Strategic Asset Allocation (2011). This report which was groundbreaking, was supported by IFC. The other public partner was CarbonTrust. It estimates the impact on investment returns through to 2050 and offers insights on how to improve the resilience of an investment portfolio in a time of climate change.
“This new study led by Mercer could not be more timely on the road to the UN climate conference in Paris,” said Christian Grossman, IFC Director for Climate Change. “The study can help investors address uncertainty by guiding them on assessing their exposure to climate risk and improve the resilience of their portfolios. It can also send a clear message to policy-makers that resolving the uncertainty around the policy direction of carbon pricing will be an important first step toward transitioning to a low carbon economy,” he concluded.
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 cautions the investors 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.
Chair of Mercer’s Responsible Investment team, Jane Ambachtsheer, said, “Whilst it is challenging, we have attempted to quantify the potential investment impacts of climate change. We recognize 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.”
The report also finds that 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. In the near term, investors need to ask what if climate change related policies are introduced more rapidly than anticipated and in the medium term, investors need to consider how to manage asset class and industry sector risks and impacts on returns.
Tackling climate change remains a strategic priority for IFC – one of the world’s largest financiers of renewable energy for developing countries and one of the largest issuers of green bonds. Last year IFC surpassed its climate-smart investment target of 20 percent of IFC’s long-term financing, reflecting a growing appreciation that clean energy, resource efficiency and climate change adaptation represent areas of opportunity for the institution and the clients.
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