Climate Risks are a Systemic Strategic Concern for Investors

Climate change has emerged as a vital part of investor risk assessment and these analyses are being applied across portfolios. Investors now have access to a growing pool of data thanks to the efforts of organizations like Ceres, the Carbon Tracker Initiative, Risky Business and the Sustainable Accounting Standards Board (SASB).


Assessing climate risks is now de rigueur for intelligent investors. The data suggests that almost all major investors incorporate climate change into their risk assessment. This is the finding in a report titled Global Investor Survey on Climate Change. This report by Mercer was commissioned by the Institutional Investors Group on Climate Change (IIGCC), the Investor Network on Climate Risk (INCR) and Investor Group on Climate Change (IGCC).

The survey of asset owners and asset managers with collective assets totaling more than $12 trillion, revealed that 87 percent of asset managers and 98 percent of asset owners now incorporate climate change risk assessments into their investment processes.

According to PwC’s Sustainability Investor Survey, 73 percent of investors say the primary driver for considering sustainability issues is risk mitigation.

This burgeoning awareness is being driven in large part by the economic damage associated with extreme weather. In a report on resilience planning titled, Weathering the Storm: Building Business Resilience to Climate Change, 9 out of 10 of S&P Global 100 Index companies identified extreme weather and climate change as current or future business risks.

Investors and companies are also increasingly concerned about the potential for supply chain interruptions associated with climate change. As explained in another PricewaterhouseCoopers (PwC) report:

“climate change will have a multiplier effect on supply chain risk…major factor set to exacerbate supply-chain risk is climate change. Often overlooked, climate change adds to complexity. It amplifies or alters existing risks, for example raw material availability (e.g. water, energy) or transport disruption due to extreme weather events. The resulting shocks on the global supply chain can be severe and persistent.”

With the aim of reducing their exposure to climate risks investors are currently inculcating strategies that inform their asset allocation. The IIGCC survey found that more than 50 percent of investors are involved with funds that are focused on climate change. An additional 15 percent of asset managers and 45 percent of asset owners claimed they were considering such allocations over the next few years. The report concluded that now’s the time to heed warnings, get ahead of the market’s turn toward more sustainable practices, and shelter your portfolio from extreme weather.

“It is encouraging that climate change is becoming a more strategic
issue with the majority of asset owners and asset managers,” said Ole
Beier SØrensen, chairman of the IIGCC and head of research and strategy
at the Danish pension fund ATP. “They increasingly view climate change as
a material investment risk/opportunity,” he said.

It is powerfully symbolic that even Wall Street itself is at risk from climate change. The rising seas that will result from a failure to curb climate change will flood the world’s financial capital. To get an idea of just how costly this could be, in the aftermath of Hurricane Sandy, the financial services industry lost $7 billion when the New York Stock Exchange was forced to close for just two days.

Failure to do a thorough climate analysis can prove very costly, while risk assessments can reveal lucrative opportunities.