Trillions at stake from climate change over next 20 years: report

Climate change could contribute as much as 10 percent to portfolio risk over the next 20 years, while investment opportunities in low-carbon technology could be as high as USD5 trillion by 2030, according to a global study released on Wednesday.

Institutional investors have numerous options for capitalizing on opportunities and managing risks arising from climate change and could benefit from increased allocation to infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets, according to the report conducted by international investment consultancy, Mercer, and a group of leading global investors representing around USD2 trillion in assets under management

However, continued delay in climate change policy action and lack of international co-ordination could cost institutional investors trillions of dollars over the coming decades,

Andrew Kirton, Chief Investment Officer at Mercer, commented: "Climate change brings fundamental implications for investment patterns, risks and rewards. Institutional investors should be factoring long-term considerations, such as climate change, into their strategic planning.

The report Climate Change Scenarios - Implications for Strategic Asset Allocation analyses the potential financial impacts of climate change on investors' portfolios, identified through a series of four climate change scenarios playing out to 2030.

These ranged from regional divergence where some regions, such as the European Union and China/East Asia take strong action to reduce greenhouse gas emissions, to the least-likely scenario of a breakdown in efforts to fight climate change.

It also looked at the estimated flow of investment into low-carbon technologies such as wind, solar and nuclear, the impacts of climate change such as more extreme storms, floods and rising sea levels and costs from global carbon policy decisions.

It found that the cost of impacts on the environment, health and food security could exceed USD4 trillion by 2030, with longer policy delays bringing rising costs, mostly from adaptation spending such as building sea walls.

It also found that investment needs could top USD5 trillion by 2030 for low-carbon technologies such as energy efficiency, biofuels, nuclear power and carbon capture and storage.

Carbon price hedge

The authors found a split between regions on emissions policies the most likely of the scenarios, with a cost on carbon emissions at USD110 per ton in the countries studied. The "delayed action" scenario sees carbon costing just USD15 a ton to 2020, but jumping to USD220 a ton globally as 2030 nears.

Taking stern action sooner on climate policy was the least disruptive and best for investors, said the report. "The uncertainties are lower than for the other scenarios, as investors are able to predict the pathways of policies with a reasonable degree of confidence," says the report of the "stern action" scenario.

In the report, a framework is outlined that can be used by institutional investors to enhance their understanding of climate-related investment risks and opportunities across asset classes and regions. Mercer's "TIP Framework" estimates the rate of investment into low carbon technologies, the impacts on the physical environment and the implied cost of carbon resulting from global policy developments across the four climate scenarios.

The launch of the report and the Mercer TIP Framework represents a collaborative endeavor led by Mercer which involved 14 global institutional investors, and was supported by the International Finance Corporation, a member of the World Bank Group, and Carbon Trust.