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INVESTING/PORTFOLIO STRATEGIES

Mercer: Limiting climate change would have no negative impact on investment portfolios

Jane Ambachtsheer

Taking action to reduce the effects of climate change would have no negative impact on overall investment portfolio returns and could enhance performance, a new report from Mercer finds.

In its “Investing in a Time of Climate Change” report published Thursday, Mercer modeled four climate change scenarios to represent a rise in global temperatures of 2 degrees Celsius, 3 degrees and two 4-degree scenarios, and the impact under each on various asset classes.

Under the worst-case scenario, with a rise in temperatures of 4 degrees Celsius, all asset classes would show a decline in annual returns.

Under a best-case, 2-degree increase scenario — under which “strong climate change mitigation action” is taken to limit global temperature increase to 2 degrees by 2050 — there would be no negative return implications for long-term diversified investors at an overall portfolio level.

Emerging markets equities, infrastructure, real estate, timber and agriculture would benefit. Some areas would suffer slightly, with developed markets equities forecast to take an 82-basis-points drag on annual returns because of the 2-degree change.

It is “huge” there would be no negative impact at a portfolio level under this scenario, said Edward Mason, head of responsible investment at the Church Commissioners for England, London, which has a £6.7 billion ($10.2 billion) investment portfolio, at a conference to launch the report.

The report can act as a starting point for investors, who must first set out their investment beliefs. “We would encourage investors to be climate aware,” said Jane Ambachtsheer, partner and global head of responsible investment at Mercer.

However, Mr. Mason urged money managers to make a “culture shift. Asset managers are often used to thinking short term, not thinking about this future makers role.” They are “the really big players in investment and engagement and the voice of public policy. Some of this is culturally uncomfortable, but we need the shift,” he said.

“The way that (money managers) assess companies, how they engage … that needs to factor back into investment processes,” said Faith Ward, chief responsible investment and risk officer at the Environment Agency Pension Fund, Bristol, England, which has £2.4 billion in assets. “That needs to hang together in a more coherent way. For us looking for asset managers, anybody that isn't gripping this issue and showing fundamental analysis in stock selection that they are making, is not going to be able to be selected going forward.”

Mercer worked with 16 investment partners, representing $1.5 trillion in assets, and was supported by the International Finance Corp., the World Bank Group's private-sector arm, in partnership with the Federal Ministry for Economic Cooperation and Development, U.K. Department for International Development and World Wildlife Fund-U.K.

ESG,