GLOBAL - Schemes must factor in climate change risk to their asset allocation strategies over the next two decades or face losing trillions of pounds, Mercer warns.
Research from the consultant - commissioned by a group leading schemes including BT Pension Scheme - anticipated climate change policy will account for 10% of a pension fund's portfolio risk by 2030, with costs hitting about £5trn ($8trn) by 2030.
Mercer said funds could combat the growing policy risk headache by diversifying their portfolios away from equities and bonds into "climate sensitive" assets.
These include infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets. Mercer forecasts a portfolio trying for a 7% return could cancel out the climate change risk by allocating 40% of its funds to these assets.
The Environment Agency, participants in the research, welcomed the switch to a policy-led asset allocation strategy.
Environment Agency head of environmental finance and pension fund management Howard Pearce said: "We think all pension funds will need to adopt a climate change-proofed financial investment strategy in the future to enable them to fulfil their fiduciary duties.
"We also want our pensioners to retire into a similar environment than we enjoy today and not one that is affected by the extremes of climate change that could reduce their life expectancy."
Mercer also predicted the increased investment in low carbon technology would increase portfolio risk by 1% but be offset by a predicted investment of about £2.5trn by 2030 in this area.
Mercer chief investment officer Andrew Kirton said: "Institutional investors should be factoring long-term considerations, such as climate change, into their strategic planning.
"Mercer is pleased to have had the opportunity to kick start such strategic discussions with a group of leading global investors."
Mercer used its ‘TIP' framework to judge the impact of climate change, a formula allowing pension funds to manage risk based on low carbon technology (T), physical impacts (I) and climate policy (P).
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