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PLSA conference speakers make case that climate change is largest macro risk

Nick Clegg, former deputy prime minister of the U.K.

Climate change is possibly the biggest macro risk for pension funds in a post-quantitative easing environment, speakers warned at the Pensions and Lifetime Savings Association's annual conference in Edinburgh on Wednesday. ​

Speakers agreed that discussions about the impact of climate change on investments need to continue beyond listed equity and expand into other assets classes such as private credit and private equity. Despite the panel's conviction on the point, the audience, through a poll conducted at the beginning of the session, did not rank climate change as the biggest risk. The audience ranked macroeconomic risks as the top concern.

"We have discussed climate risks associated with equity investments, but we need to broaden our horizon and extend it to credit markets, private equity and private credit investments," said Elizabeth Fernando, head of equities for the 60 billion ($83 billion) Universities Superannuation Scheme, London said. "We (also) need to expand (thinking about this) to real and infrastructure assets as extreme weather events affect migration patterns," she said.

"Weather events are difficult for insurers" and "uncertain cost of insurance will be a risk to portfolios," she warned.

"Shopping malls we invest in could be worth nothing if populations move away from near-sea areas (and) begin to migrate due to rising sea levels," she said.

Simon Lee, chief investment officer of the 10 billion Marks & Spencer Pension Scheme, Sheffield, England, agreed with Ms. Fernando, saying the industry needs to move the debate away from listed equity. "We need to think about sustainability so that there is business there to invest in the future. The business needs to be there in the future for me to invest in it."

Regarding other risks, the panelists agreed that short-term market inflation expectations are risks pension funds need to watch, as are rising interest rates globally. David Adkins, head of investment strategy at the 40 billion Lloyds Banking Group Pension Fund, London said: "Investors are looking at how often the (Federal Reserve) will increase rates this year. That could be a more dangerous risk if that feeds into the inflation expectation. If it starts to raise even 1% this could impact liabilities by some 10%."

On a separate panel Wednesday, Nick Clegg, former deputy prime minister of the U.K., said he expected the next source of risk in the system to located outside of the banking sector as liquidity begins to come out of the monetary system. "It would be extremely surprising to see the next financial crisis to be coming from the same source," he said. "The banking system is now so tightly regulated."

During his session on 10 years after the global financial crisis, Mr. Clegg said that because post-crisis regulations focused on banking, they pushed "finance, lending and money outside the banking system, and that could be where the next risks come from."