Costs of coping with climate change are likely to lower the long-term investment returns Australian institutional investors can anticipate by 25 basis points, according to a report released Monday.
That conclusion, in Frontier Advisors' latest "Annual Secular Outlook," marks the first time climate change has prompted the investment consultant to lower its estimates of Australia's risk-free rate.
The revision effectively lowers Frontier's long-term target for that rate to 4.5%.
Principal Consultant Philip Naylor said in a telephone interview that Frontier's decision to highlight the impact of climate change this year — among a handful of secular factors that included demographics and inequality — reflects the fact that it has become simply "too big to ignore."
While many policy paths could be taken to tackle the problem, Frontier opted to embed a "best-case scenario" into its forecasts, which assumes that governments will meet pledges they made to the 2016 Paris climate accord to limit the rise in global warming to 2 degrees centigrade, according to a news release.
"If actions to limit temperature rises by reducing carbon emissions are not achieved, then the outcome for the economy and investments will be much worse," the news release said.
Mr. Naylor said for now Frontier is limiting its analysis to the impact of climate change on Australia's risk-free rate rather than estimate the impact on specific asset classes, leaving it up to "individual clients to think through how to respond."
