Climate Change Could Cost Investors Trillions of Dollars Over Next 20 Years
Tuesday, 22 February, 2011 Leave a comment
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New research from global consultancy Mercer carries a stern warning.
According to the report, Climate Change Scenarios – Implications for Strategic Asset Allocation, continued delay in climate change policy action and lack of international coordination could cost institutional investors trillions of dollars over the coming decades.
Already, we have seen how climate-related natural disasters (drought in Russia, floods in Australia, etc.) can have a devastating impact on regional economies. This new study takes a broader approach and analyses the potential financial impacts of climate change on investors’ portfolios, identified through a series of four climate change scenarios playing out over the next twenty years.
For example, the research found that by 2030:
- Climate change increases uncertainty for long term institutional investors and as such, needs to be pro-actively managed.
- Investment opportunities in low carbon technologies could reach $5 trillion.
- The cost of impacts on the physical environment, health and food security could exceed $4 trillion.
- Climate change related policy changes could increase the cost of carbon emissions by as much as $8 trillion.
- Increasing allocation to “climate sensitive” assets will help to mitigate risks and capture new opportunities.
- Engagement with policy makers is crucial for institutional investors to pro-actively manage the potential costs of delayed and poorly coordinated climate policy action.
- Policy developments at the country level will produce new investment opportunities as well as risks that need to be constantly monitored.
- The EU and China/East Asia are set to lead investment in low carbon technology and efficiency improvements over the coming decades.
“This report is unique and ground-breaking in quantifying the increased portfolio risk arising from global efforts to tackle climate change. It demonstrates that unless this risk is tackled intelligently by increasing exposure to climate sensitive assets, then long term rewards could fall,” explained Bruce Duguid, Head of Investor Engagement, The Carbon Trust, which collaborated with Mercer on the report. “The findings undermine the notion of a conflict between ‘green’ investing ‘ and acting in beneficiaries long term financial interests. This will have profound implications for fiduciary duties and places a clear obligation to increase analysis of the consequences of climate change for portfolio management.”