Institutional investors urged to act as climate change poses impact on returns

Mercer’s latest climate change report identifies short and long term actions investors can consider to mitigate risks and access opportunities

Mercer, a global consulting leader in advancing health, wealth and career, announced today the findings of its updated climate scenario investment model in the report, Investing in a Time of Climate Change – The Sequel (“the Sequel”). Since 2009 Mercer has published research and advice on climate change as a systemic risk for investors including its acclaimed Investing in a Time of Climate Change report (2015). Mercer’s climate scenario model is consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and enables investors to assess climate-related financial risk for a total portfolio, across all asset classes and industry-sectors, to quantify a forward-looking ‘climate impact on return’ over multiple decades.

The Sequel models three climate change scenarios, a 2°C, 3°C and 4°C average warming increase on preindustrial levels, over three timeframes – 2030, 2050 and 2100. The longer timeframe (Mercer’s 2015 report was modeled to 2050) provides greater visibility into the expected impacts of natural catastrophes and resource availability for each temperature increase. A new stress-testing addition to the model enables investors to assess how a more sudden change in view on scenario probabilities, market awareness and/or environmental damages could play out.

“A key conclusion is that investing for a 2°C scenario is both an imperative and an opportunity. It’s an imperative, since for nearly all asset classes, regions and timeframes, a 2°C scenario leads to enhanced projected returns versus 3°C or 4°C and therefore a better outcome for investors. It’s an opportunity, since although incumbent industries can suffer losses in a 2°C scenario, there are many notable investment opportunities enabled in a low-carbon transition,” said Helga Birgden, Global Business Leader, Responsible Investment, Mercer. “The modelling shows that greater inclusion of sustainable assets into portfolios can enhance returns. The evidence is compelling and reinforces the findings made in Mercer’s 2015 climate change report, supporting greater urgency for action to achieve a well-below 2°C scenario.”

Investors should also focus on the potential short-term implications of investing in a time of climate change. Sudden changes in return impacts are more likely than neat, annual averages, so stress testing is an important tool.

“Testing an increased probability of a 2°C scenario or a 4°C scenario with greater market awareness results in market re-pricing events that could impact the modelled diversified portfolios by between +3% to -3% in less than a year.” added Birgden.

The Sequel provides investors with a clear framework to start actively taking on a ‘Future Maker’ approach and implementing the transition to a 2°C scenario. Future Makers, as defined in Mercer’s 2015 climate change report, advocate for 2°C-aligned business plans from companies exposed to transition risk and press governments to take urgent action in implementing the Paris Agreement, including an increase in commitments to address climate change.

“This is clearly a fiduciary issue as it is about managing risk as set out in the World Economic Forum 2019 report. Asset owners should consider climate change at every stage of the investment process, from investment beliefs, policy and process to portfolio construction decisions.” Deb Clarke, Global Head of Investment Research, Mercer, said.

Mercer has already advised a number of ‘first mover’ clients with the updated model in Australia, Europe and the UK and applied the new model to key diversified portfolios for Mercer’s Delegated Solutions offerings in Europe and the Pacific.  

Mercer’s Climate Change work is a business-wide collaboration, led by the Responsible Investment (RI) business. Mercer’s Responsible Investing Pathway maps out the full scope of the RI services Mercer offers, structured around integrating RI into the core stages of investment: beliefs, policy and process, and portfolio implementation.