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For a pension asset manager like AP 1 what kind of implications do you see?
Institutional investors such as AP1 can respond to the findings of this study in a
number of ways. The most important step will be to consider climate change in
strategic discussions of long-term investment risks and opportunities. The framework is
not intended to provide a simplistic “tick box” solution for investors to apply in a
mechanistic way but to help provide a better understanding of the driving forces behind
climate change, the sensitivity of asset classes and regions to these drivers, and the
uncertainties that remain. This will open for further debate and discussion among
investment decision makers. Mercer has suggested a few first pragmatic actions to
consider:
• Introduce a climate risk assessment into ongoing strategic reviews.
• Increase asset allocation to climate-sensitive assets as a climate “hedge”.
• Use sustainability themed indices in passive portfolios.
• Encourage fund managers to proactively consider and manage climate risk.
• Engage with companies to request improved disclosure on climate risk.
Our findings also highlight the need for investors to communicate with policy makers
the need for clear, credible and coordinated policy response and for dialogue to
emphasise the potential economic and financial cost of delay.
Climate change is a controversial subject, are you absolutely sure there are negative
impacts from climate change?
For research on the physical impacts of climate change, we relied on research from the
Grantham Research Institute on Climate Change and the Environment at London
School of Economics. The Institute is chaired by Lord Nicholas Stern, author of the
2006 Stern Review, and brings together international expertise on economics, finance,
geography, international development and political economy. They did not find much
variation in physical impacts to the environment across the scenarios within the
horizon of this study which focused to 2030. The physical impact risks were, however,
found to increase considerably 2050 and beyond. There are also some countries and
regions that will suffer disproportionately (such as Africa, Australia, parts of Latin
America and south east Asia).
While there is still great uncertainty about the physical impacts of climate change,
there is a consensus amongst policymakers and society at large of the need to take
action. Our research aimed at translating the current evidence of physical impacts
from climate change, as well as technological and policy changes into a framework
that is intended to help investors to decide how best to try to manage the added risks
arising from climate change.
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You elaborate several scenarios in your report, which scenario is the most realistic
do you believe?
The scenarios are not meant to predict the future, rather, they are used to analyse the
possible risks more specifically and to guide investors as to the changing likelihood of
the scenarios over time.
Our research suggest that the Regional Divergence scenario is most likely, where some
regions (EU and China/East Asia) demonstrate strong leadership in responding to the
need to reduce emissions and act locally. Overall, this scenario involves a high degree
of economic transformation and investment in some regions, but the level of uncertainty
increases for investors due to the disparate nature of the policy responses across the
different regions, increasing market volatility.
Who are mainly responsible for curbing the climate change, the politicians or
companies and economic stakeholders like pension funds?
Given the complexity of climate change, the response to this issue needs to come from a
range of actors from both the public and private sector (including consumers,
businesses and investors). Our research suggest that it is crucial for institutional
investors to engage with policymakers on the specific details of policy plans and
measures as part of their risk management process, to help protect and enhance the
long-term value of the assets they oversee.
All in all, will climate change make investments more profitable or more risky in the
future?
The great uncertainly surrounding climate change is associated with increased
volatility and therefore increased risk to investors overall. However, investors could
benefit from increased allocation to investments that will adapt to a low carbon
environment within infrastructure, real estate, private equity, agriculture land,
timberland and “sustainability” themed assets.
We have recently witnessed a financial meltdown which had severe effects on not the
least pension funds, could the world economy also be facing a climate meltdown that
will have economic repercussions?
There have been a significant number of institutional investors trying to understand the
risks and opportunities surrounding climate change for many years, including those
involved in this project. This study argues that to be better prepared for future financial
crises, it is worth considering non-traditional risks such as climate change to improve
the resilience of portfolios.
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