Mercer Recommends Investment Shift to 40 Percent ‘Climate-Sensitive Assets’

The convergence between sustainability/corporate social responsibility and investing appears to be accelerating. And, by most indications, it appears investors are more ready for the trend than the vast majority of investable companies are. 

The latest fuel comes from a major new study by the consulting firm Mercer, which recommends that institutional investors shift up to 40 percent of their assets into “climate-sensitive” assets. The rationale is to mitigate environmental costs, which Mercer says could contribute as much as 10 percent to portfolio risk over the next 20 years.

The report noted that the traditional way of managing risk, via a shift to a more conservative asset allocation, “may do little to offset climate risks.” Instead, it suggested increasing exposure to certain “climate-sensitive” asset types, including infrastructure, real estate, private equity, agriculture, timberland and sustainable assets – even though many of these have been traditionally deemed as more risky on a standalone basis.

According to the study, over the next 20 years, investment opportunities in low carbon technologies could reach $5 trillion, and climate change-related policy changes could increase the cost of carbon emissions by as much as $8 trillion.

Mercer recommended that investors begin taking the following measures:

  • Introduce a climate risk assessment into ongoing strategic reviews
  • Increase asset allocation to climate-sensitive assets as a climate “hedge”
  • Use sustainability-themed indices in passive portfolios
  • Encourage fund managers to proactively consider and manage climate risks
  • Engage with companies to request improved disclosure on climate risks

Of course, it remains to be seen how many companies are really ready for the trend, given that less than 10 percent of multinational companies currently report on sustainability/CSR efforts. And, of those, only a very few make it part of the primary tool for investor communications, the annual report.

The study was based on a survey of 14 leading global institutional investment firms with approximately $2 trillion in assets. The free public report, Climate Change Scenarios – Implications for Strategic Asset Allocation, is available for download on Mercer’s website.

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