Investors must take action to avoid climate change risk

By Maura Forrest

June 18, 2015

Investors can no longer afford to ignore the effects of climate change on their portfolios. 

So says a new study from Mercer, which estimated the potential impacts of climate change on asset classes and industry sectors between 2015 and 2050. The report modelled these impacts for a range of climate scenarios, with temperature increases from two to four degrees Celsius.

The study found that climate change will have an impact on investment returns in many cases, and investors need to understand the potential risks. 

“This new study led by Mercer could not be more timely on the road to the UN Climate Change conference in Paris,” said Christian Grossmann, the director for climate change at the International Finance Corporation (IFC), the World Bank’s private sector arm, in a news release. IFC funded the report, along with 15 other investors that included U.K. and German development agencies.

Grossmann urged policy makers to resolve “uncertainty” around carbon pricing as a first step toward addressing these risks.

Not all the financial impacts of climate change are predicted to be negative. The report found that the largest effects are seen at the industry level—for example, average annual returns from the coal industry could fall by 18 to 74 per cent over the next 35 years. But in the same time frame, annual returns from renewable energy could rise by six to 54 per cent.

If the global temperature rise does not exceed two degrees, the report predicted that diversified investors will not experience negative returns.

Moreover, a two-degree warming scenario could benefit emerging market equities, real estate, timber, and agriculture. But four degrees of global warming could have a negative effect on all of those sectors, the report found.

There are some recent indications that investors are taking climate change seriously. The White House received $4 billion in investments this week from organizations including the Sierra Club Foundation and Goldman Sachs to support profitable clean energy projects.

But in many cases, investors are still dangerously exposed to the risks of climate change. For instance, a recent analysis from the Guardian found that the pension funds of millions of people worldwide are heavily invested in coal, though the coal industry is plummeting. Even the UN’s pension fund has more than $100 million invested in coal.



Photo Credit: Alexander G