Big investors join in climate change asset allocation study
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SYDNEY, March 9 AAP
March 09 2010, 6:34PM
Adaptation to climate change is not just a problem for scientists and engineers - big institutional investors are turning also turning their minds to it.
But key uncertainties they see are not so much the changes in the climate, but the policy responses of governments and their effects on economies and markets.
A group of 15 institutional investors from around the world is collaborating in a study of the likely impact of climate change on asset allocation.
Mercer, which has a sizeable Australian footprint, has had a key role in setting up the study.
The "investor partners" in the study include a home-grown Australian contingent as well - superannuation funds AustralianSuper and VicSuper.
They are in the company of some major players from around the world - the Norwegian Government Pension Fund, the California Public Employees Retirement System (CalPERS) and British Columbia Investment Management Corporation (bcIMC) among others.
Also involved are the UK's government-owned Carbon Trust, a non-profit firm set up to promote the transition to a low-carbon economy, and International Finance Corporation (IFC), which is part of the World Bank Group.
Expertise has been drafted in to help with the analysis.
"We're partnering with Grantham Research Institute, chaired by Nicholas Stern, and also Vivid Economics," said Helga Birgden, Mercer's Melbourne-based acting global head of responsible investment.
Vivid Economics is a UK-based consulting firm specialising in the economics of climate change.
The Grantham Research Institute on Climate Change and the Environment is located in the London School of Economics and Political Science.
The institute's chairman, Sir Nicholas Stern, chaired the influential Stern Review on the Economics of Climate Change, published in 2006.
The new study will use a scenario-based framework to map out potential risks and opportunities in asset classes and regions, with investment horizons out to 2030 and 2050.
It will look at volatility and correlations among asset classes, regions and sectors under each scenario and consider each scenario's impact on strategic asset allocation, according to a statement issued by Mercer Australia on Tuesday.
The study builds on work that has already been done, Birgden said.
"The research partners that want to get involved in the Mercer study have obviously been doing some work and consider this issue seriously, as a strategic issue," she said.
"And a number of them are investing in thematic investments such as clean tech, renewable energy, water and so on," Birgden said.
"So there already are investments which effectively hedge against climate change being undertaken by institutional investors.
"But the amount of understanding around strategic asset allocation needs to be deepened and that's what this project is really trying to address," she said.
There will be a twin focus in the study.
The first would be the physical impact of climate change and how it will affect investment in asset classes and regions - such as property in coastal areas, for example.
The second would be the effect of government policies, Birgden said.
AustralianSuper chief investment officer Mark Delaney said investors had been grappling with climate change from both these angles for a number of years.
"The impact of the second has been very difficult for people to get a handle on, because there have been different responses proposed, different timelines, different magnitudes (of emissions cuts), carbon tax, carbon trading, global versus domestic, renewable energy targets, et cetera," he said on Tuesday.
And then there was the additional uncertainty of how those policies might affect economies and markets, Delaney said.
The study would work on four different scenarios and then do modelling on their effect on investment portfolios, he said.
However the study would not try to second-guess the consensus among climate scientists.
"This is taking the projected science outlook as a given, and then modelling the impact of those policy responses under different scenarios," he said.
"We think its fairly likely there's going to be a policy response on a global basis - the world's inching towards it - and it's going to be an issue for building investment portfolios," he said.
By Garry Shilson-Josling, AAP Economist
