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The Actuary The magazine of the Institute & Faculty of Actuaries

Climate change looms large on investment risk radar

The vast majority of investors now consider climate change a material investment risk or opportunity and incorporate climate change risk assessments into their existing investments, according to a report published today.

The report, conducted by Mercer and commissioned by the Institutional Investors Group on Climate Change (IIGCC), the Investor Network on Climate Risk (INCR) and Investor Group on Climate Change (IGCC), details the investment practices of asset managers, such as primary fund managers, and asset owners, such as pension funds, towards climate change issues.

Based on survey responses from 44 asset owners and 46 asset managers with collective assets totalling more than $12trillion, the report found that 87% of asset managers and 98% of asset owners now incorporate climate change risk assessments into their investment processes.

While asset owners and asset managers were deemed to be making strong progress on addressing climate change in a variety of investment areas, the report concludes that there is a significant variation in progress regionally, with US investors continuing to lag behind their counterparts in Europe, Australia and New Zealand.

In addition to climate policy, the results show that demand from institutional investors including pension funds remains a key driver for changes in the investment practices of asset managers. While over three quarters of asset owners (77%) consider whether potential fund managers integrate climate change in their investment processes there is still little in the way of contractual requirements, with only a minority of asset owners (18%) having developed a formal process to assess prospective managers’ climate efforts.

"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. However, to address the risks and opportunities arising from climate change, investors must have the tools to take meaningful action.

"More than anything investors need stable and transparent policy frameworks which provide clarity and certainty. A number of countries and regions are moving in the right direction, but there is still a long way to go. Policy makers need to remove barriers to low carbon investment and they need to create a relatively predictable price on carbon."

Other key findings from the Global Investor Survey on Climate Change report:

>> Listed equity continues to be the asset class for which investors consider climate change issues most frequently. There continues to be a lack of analysis of climate change issues for investments in hedge funds, government bonds and commodities

>> Over half of investors surveyed invest in funds focused on climate change, with a further 15% of asset managers and 45% of asset owners considering an allocation to thematic investments over the next few years

>> The integration of climate change risk and opportunity is taking place where a carbon pricing system and firm policy measures are in place

>> Despite private equity investors actively assessing climate change policy, there is very little monitoring of such issues at a portfolio level. During 2010 only 38% of general partners reported on how climate change-related investment risks and opportunities are addressed within private equity portfolios.