Institutional investors are beginning to incorporate climate change risk factors into their asset allocation processes, and leading funds are contemplating a bevy of environmentally friendly investments.
Major funds such as the Swedish buffer fund AP1, the British Columbia Investment Management Corp., the BT Pension Scheme and the Environment Agency Active Pension Fund already have invested billions in environmentally friendly assets and are planning to expand their investments.
But while leading funds already have made climate-related investments part of their portfolios, the move to incorporating climate change into their asset allocation processes or understanding how climate change risks affect them at the total portfolio level is just beginning.
A recent report from consultant Mercer seeks to speed that process.
Investors need to broaden their strategic investment approaches to include an awareness of risk factors as well as diversifying into climate-sensitive asset classes, such as infrastructure and private equity, according to Danyelle Guyatt, principal and global head of research, responsible investment at Mercer.
“There is an increased source of risk from climate change, and it could be material,” Ms. Guyatt said at a recent client conference on the report in London. Investors should “embed an early warning system” into their risk management processes, specifically by having trustees view and discuss climate change as a strategic risk. “It should be looked at not as a nice, tree-hugging thing to do, but as part of a prudent risk management process,” Ms. Guyatt said.
At AP1, the 218.8 billion Swedish kronor ($33.9 billion) fund that provides buffer funding for the government's pay-as-you-go social security system, officials “started to (use factor-risk analysis) in 2010 as part of the (Mercer) project ... and will use it now in the future,” said Ossian Ekdahl, head of communications and corporate governance at the Stockholm-based fund. “It's a bit early to say, but we will explore the possibility” of allocating directly to climate change risks in the future.
AP1 also has increased its exposure to climate-sensitive asset classes and is considering investments in timberland and infrastructure. In 2010, the fund boosted its real estate exposure to 5% from 3.3% at year-end 2009 and made new private equity commitments of 1.8 billion kronor.
“Of course we make a very broad analysis before we move into a new asset class, and climate change sensitivity is just one factor behind that,” Mr. Ekdahl noted.