The 14 institutional investors participating in the climate change strategic asset allocation study, a collaborative between Mercer, Carbon Trust and the IFC, will all receive individual portfolio scenario analysis of how physical and policy climate change-related events could affect their portfolio at an asset allocation level.
The investors include AP1, APG, AustralianSuper, British Columbia Investment Management Corporation, CalPERS, CalSTRS, the Environment Agency Pension Scheme, the Maryland State Retirement and Pension System, the Norwegian Government Pension Fund, OMERS, PGGM and VicSuper.
The chief investment officers and heads of strategy for the funds have collaborated on the research and development of the study, which was finalised at a two-day workshop in January, and will focus on strategic implications rather than stock selection or market timing.
Helga Birgden, Mercer’s acting global head of responsible investment, said the funds are hopeful the study will provide guidance to investors when they consider asset allocation in regard to climate change.
“The thinking of the funds shows this is a very serious endeavour. We will take the results of this and stress test their own models in order to determine where to best spend their risk budgets,” she says.
The process of the study aims to identify risks not previously identified and factor them into the analysis but also to recognise the investment opportunities.
“These opportunities should not be viewed as hot money or opportunistic investments, but be reviewed strategically,” she says.
The Grantham Research Institute on Climate Change and the Environment and Vivid Economics are leading the research on the economic and financial impact of climate change scenarios.
The approach uses scenario tests in which a range of macro and micro economic factors, ranging from dramatic measures that have major economic impact such as a significant increase in temperature beyond the forecasts made in the Stern Report, to modest physical impacts and their effect on the environment.
Birgden says it will consider two factors – the physical impact on assets and the policy and government influence, such as reaching emissions targets, and what the market responses might be to the policy changes.
“There is a lot in the mix, – she says. “The factors include impact from a macro economic view such as the drivers and impact on GDP and fiscal policy to a more micro level like financing mechanisms and technology.”
“Climate change is a systematic issue, it crosses borders and asset classes. This study analyses the data and fills a gap on where institutional investors focus their time. Rather than look at market timing or stock selection, the mega theme of climate change drives us to look at systematic risk. This provides focus for investors.”