Mercer Presentation on Investing and Climate Change Report On NAIC 2015 Summer Meeting Agenda

 

A special presentation on Mercer’s recently released report entitled “Investing in a Time of Climate Change” is scheduled as part of the National Association of Insurance Commissioners’ (“NAIC’s”) upcoming Summer 2015 National Meeting in Chicago on August 15 from 8 a.m. to 9 a.m.

Given by Mercer’s Global Head of Investment Research Deb Clark as part of the Climate Change and Global Warming Working Group’s agenda, the presentation will focus on the report’s investment modeling, which estimates the potential impact of climate change on returns for portfolios, asset classes and industry sectors between 2015 and 2050 based on four climate change scenarios and four climate risk factors.  The four scenarios represent a rise in global temperature above pre-industrial era temperatures of 2°C, 3°C and two 4°C scenarios (with different levels of potential physical impacts). 

According to the NAIC, Mercer’s report represents a unique and unprecedented effort to model the complex impacts of climate change on the diversified portfolios of institutional investors, including insurers. 

“The timing and magnitude of these impacts is uncertain, though for fiduciaries making good-faith efforts to understand them is prudent so that portfolios can be positioned for resilience.  Mercer’s modeling methodology provides users with a means of managing climate change risk just like any other portfolio risk by quantifying in financial terms the potential impacts of the phenomenon on industry sector, asset class and total fund results,” the NAIC wrote.

An updated version of Mercer’s news release on the report is reprinted below.  To access the report and its accompanying information, click here.

Mercer is a wholly owned subsidiary of Marsh & McLennan Companies.

 

Climate change:  New investment risk demands action by investors, cautions new research

A new report from Mercer modelling the potential impact of climate change on investments has found investors cannot ignore the implications for investment returns. The research reveals investors can manage the risk most effectively by looking “under the hood” of their portfolios and factoring climate change into their risk modelling, which requires a significant behavioral shift for most.

The report outlines actions for investors to manage key downside risks and access opportunities.  It is the culmination of a research project that began in September 2014 and was launched in London this past June ahead of negotiations for a new global climate agreement at the end of 2015 in Paris.

The investment modelling in Mercer’s report estimates the potential impact of climate change on returns for portfolios, asset classes and industry sectors between 2015 and 2050 based on four climate change scenarios and four climate risk factors.  The four scenarios represent a rise in global temperature above pre-industrial era temperatures of 2°C, 3°C and two 4°C scenarios (with different levels of potential physical impacts). 

To produce the report, Mercer collaborated with 16 investment partners collectively responsible for more than US$1.5 trillion.  It was supported by the International Finance Corporation (“IFC”), the private sector arm of the World Bank Group, in partnership with Federal Ministry for Economic Cooperation and Development, Germany, and the UK Department for International Development.  The study was also supported with contributions from Mercer’s sister companies NERA Economic Consulting and Guy Carpenter, along with input from 13 advisory group members. 

The investment modelling supports the following key findings:

• Climate change will give rise to investment winners and losers

Based on the scenarios modelled, climate change is expected to have an impact on investment returns; investors need to take action to understand and mitigate the risks and maximize value at the asset, industry sector and portfolio level.

• The biggest risk is at the industry level

Differentiation between winners and losers is most apparent at the industry level.  For example, depending on the climate scenario that plays out, the average annual returns from the coal sub-sector could fall by anywhere between 18 percent and 74 percent over the next 35 years, with effects being more pronounced over the coming decade (eroding between 26 percent and 138 percent of average annual returns over the next 10 years).  Conversely, the renewables sub-sector could see average annual returns increase by between 6 percent and 54 percent over a 35-year time horizon (or between 4 percent and 97 percent over a 10-year period) depending on the climate scenario. 

• Asset-class return impacts will be material, but vary widely by climate change scenario

Growth assets are more sensitive to climate risks than defensive assets. 

A 2°C scenario could see return benefits for emerging market equities, infrastructure, real estate, timber and agriculture.  A 4°C scenario could negatively impact emerging market equities, real estate, timber and agriculture.

• A 2°C scenario does not have negative return implications for long-term diversified investors at a total portfolio level over the period modelled (to 2050), and is expected to better protect long-term returns beyond this timeframe. 

Chair of Mercer’s Responsible Investment team Jane Ambachtsheer said “Whilst it is challenging, we have attempted to quantify the potential investment impacts of climate change. We recognise that markets do not always price in change; they are notoriously poor at anticipating incremental structural change and long-term downside risk until it is upon us.” 

“Our report identifies the ‘what?’ the ‘so what?’ and the ‘now what?’ in terms of the impact of climate change on investment returns.  These insights enable investors to build resilience into their portfolios under an uncertain future.

“This report can act as a guide to creating an action plan.  Whether it is setting portfolio de-carbonisation targets, investing in solutions that address risks and opportunities, or increasing engagement with managers and companies, our report shows investors how they might take action.  Engaging with policy makers is also crucial and helps empower investors in their role as ‘future makers’,” Ms Ambachtsheer said.

Russell Clarke, Mercer’s Global CIO for Mainstream Assets, added a portfolio construction perspective:  “This study helps us better prepare to navigate the changes that such a structural and systemic issue as climate change may represent.  We believe it’s a significant investment risk that investors should be aware of and able to act upon in close collaboration with investment managers.”

IFC Director for Climate Change Christian Grossmann commented “This new study led by Mercer could not be more timely on the road to the UN Climate Change conference in Paris.

“In a time of climate change, this study can help investors address uncertainty by guiding them on assessing their exposure to climate risk and improve the resilience of their portfolios.  It can also send a clear message to policy-makers that resolving the uncertainty around the policy direction of carbon pricing will be an important first step toward transitioning to a low carbon economy.”

Other investment partners’ comments on their involvement in the project can be accessed by clicking here.

 

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