Climate change could adversely affect investment returns in the coming years. With that in mind, investors should rely on environmental risk modeling to determine how to adapt and minimize impact, Mercer concluded in a new report.
“Based on the scenarios modeled, climate change is expected to have an impact on investment returns,” Mercer noted. “Investors need to take action to understand and mitigate the risks and maximize value at the asset, industry sector and portfolio level.”
Mercer’s report, “Investing in a time of climate change,” relied on investment modeling that looked at a rise in global temperature above pre-industrial era temperatures of 2 degrees and 3 degrees Celsisus. Two separate scenarios involving a 4 degree Celsius-rise in global temperature were also in play, using different levels of physical impacts.
Beyond finding that climate change would have an impact on investment returns, Mercer found that it will have a widely varying affect on various industries. The coal sub-sector, for example, could see returns fall between 18 percent and 74 percent over the next 35 years, depending on which climate change scenario comes to pass. Effects could be even more severe over the coming decade, Mercer said. On the other hand, the modeling suggests renewables could jump between 6 percent and 54 percent over that 35 year period, more so over the next 10 years, depending on which climate change scenario is realized.
Asset-class returns won’t be spared either. Mercer said that impacts will be “material,” but should vary widely, depending on which climate change model pans out. A smaller temperature increase could help emerging market equities, infrastructure, real estate, timber and agriculture. A larger temperature hike could hurt those same sectors, according to the report.
Russell Clarke, Mercer’s global CIO for mainstream assets, said in prepared remarks that the study helps to “better prepare to navigate the risk changes that such a structural and systemic issue as climate change may represent.”
Mercer, a Marsh & McLennan wholly owned subsidiary, unveiled the study earlier in June. It collaborated with 16 investment partners. The IFC – the private sector arm of the World Bank Group – supported the effort, along with the Federal Ministry for Economic Cooperation and Development in Germany and the U.K. Department for International Development. Mercer’s sister companies NERA Economic Consulting and Guy Carpenter also participated, among others.
Source: Mercer