According to a new report, Climate Change Scenarios – Implications for Strategic Asset Allocation, uncertainty about global climate change policies and their associated adjustment costs could cost investors trillions of dollars over the next 20 years and be responsible for as much as 10 percent of investment portfolio risk. The report analyzes the impact of climate change on institutional investment portfolios and identifies a series of pragmatic steps for institutional investors to consider.

An investment consultant, Mercer, coordinated the study, which also included participation by fourteen global institutional investors and a variety of governmental agencies and nongovernmental organizations. “This study makes a significant contribution to our ability to measure the level of risk that climate change creates for investment portfolios,” said Rachel Kyte, Vice President of International Finance Corporation, which supported the study.

According to the report, the physical impacts of climate change are unlikely to have a significant effect on portfolio risk in the next 20 years; however, the political uncertainty and cost of responding to climate change policy, regulation, technology and impacts need to be factored into investment decisions. The study asserts that climate change risk is not adequately incorporated into traditional methods of assessing asset performance and modeling strategic asset allocation, both of which rely for the most part on historical performance data rather than forward-looking contingencies.

Improvement Steps

The report encourages investors to take the following steps to improve the resilience of their portfolios to climate change risk:

• Introduce a climate risk assessment into ongoing strategic reviews;
• Increase asset allocation to climate-sensitive assets (e.g., infrastructure, real estate, private equity, agricultural land, timberland) as a climate hedge;
• Use sustainability-themed indices in passive portfolios;
• Encourage fund managers to consider and manage climate risks proactively; and
• Engage with companies to request improved disclosure on climate risks.

The study also highlights the need for investors to communicate with policy makers about the need for a “clear, credible and internationally coordinated policy response [to climate change issues] and for dialogue to emphasize the potential economic and financial cost of delay.”

About the Author

Michael Bittner, CPEA, is an associate partner in the Boston, U.S.A. office of Environmental Resources Management and editor of the EHS Journal. He has more than 20 years of experience in the EHS field, including 17 years of EHS consulting experience and four years as the corporate environmental manager for a U.S. Department of Defense contractor. Mr. Bittner specializes in global EHS solutions including

• Compliance and management systems auditing.
• EHS management systems implementation and design.
• Sustainability solutions.
• Mergers and acquisitions support.

He is a member of the Board of Directors for the Auditing Roundtable.

Photograph: Singapore Currency 3 by Adrian van Leen, Nollamara, Perth, WA, Australia.

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