It is in investors’ best interest to support the low-carbon transition
Institutional investors of all stripes — from those responsible for paying pensions or endowment grants to those providing wealth management products — collectively manage trillions of dollars globally. They each have varying objectives and portfolio allocations and function within different regulatory requirements and contexts. However, they are typically true long-term investors, allocating across the global economy to deliver returns to members, beneficiaries and stakeholders over multiple years or decades.
Recently, evidence has grown to demonstrate substantial climate-related financial implications for investors. As such, financial regulators are increasingly formalizing the expectation that investors consider the materiality of climate-related risks and manage them as part of their fiduciary duties — particularly for pension funds.Two key elements necessitate this fiduciary duty alignment: financial materiality and growing legal and regulatory consensus.
Technology and policy changes will be necessary — and are, to some extent, already underway — to transform the economy away from fossil fuels and mitigate additional temperature increases. This transition necessarily will open up certain companies and industries to increased risk. The financial implications most naturally point to the energy sector, but transformative change invariably will have significant implications for all energy-dependent and high-emitting sectors of the economy.Physical risk captures the damages that come with temperature increases that we have failed to avoid. The frequency of storms, wildfires and floods will shift, as will the availability of natural resources such as water. The willingness of and ability for society to adapt to these changes is uncertain. Physical damages are expected to negatively affect sectors such as consumer staples and telecoms. Investors with real asset exposures, such as property (held directly or indirectly), will need to increasingly review insurance cover and uninsured loss implications together with additional capital expenditure requirements.The expected financial materiality of these risks is evidenced in Mercer’s 2015 "Investing in a Time of Climate Change" report and the recently released sequel. It is supported in reports by The Bank of England, the G-20 Financial Stability Board and The Economist Intelligence Unit (PDF), as well as an increasing number of other investment-industry participant reports on recommended actions.
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