Investors can no longer ignore the impact that the world’s changing climate will have on their portfolios, according to a report led by Mercer and supported by IFC, in partnership with Germany’s Federal Ministry for Economic Cooperation and Development and the UK Department for International Development (DFID).
The report—“Investing in a Time of Climate Change”—assesses investment exposure to climate risk, estimates the impact on investment returns through 2050, and offers insights on how investors can improve the resilience of their portfolios.
Estimating the impact of climate change on returns, the report concludes that climate change will create investment winners and losers, with the energy sector the most significantly impacted. The coal industry will be the biggest loser, says the study, which updates a 2011 report.
The renewable sector, meanwhile, is expected to be the biggest winner. Depending on the climate scenario that plays out, average annual returns in the coal sector could fall by 26 percent to 138 percent over the next ten years. Conversely, average annual returns in the renewables sector could increase by between 4 percent and 97 percent over the next ten years.
The study shows that effects on returns from climate change are inevitable. However, if we manage to cap the temperature increase to two degrees Celsius, financial returns for long-term diversified investors will not be jeopardized because of investment opportunities created by the world’s transition to a low-carbon economy.
The research was conducted as a global collaboration, led by Mercer, with input from 16 asset owners and asset managers (four in US, four in Australia/New Zealand and eight in Europe), representing more than $1.5 trillion in assets under management.