Do You Consider Climate Change as an Investment Risk Yet?


28. August 2020

Investors who take climate risks into account in their asset allocation are still not very common. The question is: Why should one already deal with climate risks in the portfolio – even if it is not yet legally or regulatory obligatory?

As early as 2016, Mercer, together with the Center for International Environmental Law (CIEL), prepared the report "Trillion Dollar Transformation"  on the financial and legal risks for pension funds in connection with climate change. In my opinion, we can draw the following conclusions from the report:

  1. The model scenarios used in the report show that climate change will have a direct impact on the expected returns of investments. Investors will need to consider this as an additional variable in performance.
  2. The impact on individual sectors will play a major role. Profit and loss expectations vary significantly depending on the sector. If, for example, one considers an investment period of 35 years, losses of up to 75 percent must be assumed in the fossil raw materials sector, while a profit of 54 percent can be expected in the renewable energies sector.
  3. Regional equity returns vary depending on which climate model scenario is used: For example, a 2°C scenario has a positive impact on emerging markets equities, while a 4°C scenario impact these markets negatively.
  4. The 2°C scenario does not necessarily have to have a negative impact on the yield of overall portfolios until 2050. The expectation is that long-term returns will be better protected through the integration of climate risks.

From science to the consciousness of politics and the financial world   
The "Trillion Dollar Transformation" is only one of many reports dealing with climate change. The results of the different studies are largely the same: The sooner investors deal with climate risk and integrate it into investment considerations, the better they will be able to protect themselves from possible negative consequences.

As we all know, the issue of climate change per se is not new. For decades, many scientists have been pointing out the associated risks. Since the Paris Agreement in December 2015 , in which 195 countries agreed on a worldwide and legally binding climate protection agreement, the importance of climate change has also moved increasingly into the focus of politics and businesses. Politicians, economists and regulators are working on joint measures to be implemented quickly. In December 2016, for example, the European Commission (EC) established the High-Level Expert Group on Sustainable Finance (HLEG)  to develop a strategy for integrating sustainability into European financial policy.

In addition, on 26 September 2018, the Task Force on Climate-related Financial Disclosures (TCFD) published its first report with recommendations on the integration of climate risks in financial reporting . In mid-February 2019, UNPRI - the UN organization that has developed principles for responsible investing - announced that the TCFD recommendations for PRI-signatories  will be included.

I could mention other developments at this point that illustrate the increasing relevance of the issue. Perhaps more about this at another point. Ultimately, it is up to each investor to decide how well he or she will prepare for the consequences of climate change and whether new opportunities will be developed on the basis of the risks and whether they will be aligned for the future. As A. Huxley once said: " Facts do not cease to exist because they are ignored." Climate change is real and the European Commission's efforts to implement the Paris Agreement show how seriously the topic is taken. If you add the expectations of various stakeholders who are increasingly developing an awareness of sustainability, I think investors should at least take a look at the matter.   

Disclaimer: FOR PROFESSIONAL INVESTOR USE ONLY. References to Mercer shall be construed to include Mercer (Austria) GmbH and/or its associated companies. This article is for information purpose only and does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products (including collective investment schemes) or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend. Furthermore, it does not contain investment advice or legal advice in respect of actions you should take relating to your particular circumstances. No investment decision should be made based on this information without obtaining prior specific, professional advice relating to your own circumstances.


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