The Institutional Investors Group on Climate Change (IIGCC) has published detailed advice on how to integrate climate risks and opportunities into investment processes.
In the same week as the boss of one of the UK's top energy companies warned the economic impact from climate change could prove to be worse than that from coronavirus, a group of top investors has set out new guidance for how investment firms can manage escalating climate risks.
IIGCC released two new reports yesterday - 27 May - (available here and here) that set out how investors and asset managers can integrate the risks and opportunities presented by the physical impacts of climate change into their investment processes.
The reports - which have been developed with specialist consultants Acclimatise and Chronos Sustainability, and support of the Universities Superannuation Scheme - draw on contributions from a number of leading investors, many of whom have stepped up climate risk management efforts in recent years.
The IIGCC said the reports aim to build on growing investor engagement with the systemic risks presented to investment portfolios presented by climate change and the transition towards cleaner technologies and infrastructure.
The guidance highlights how research from Cambridge University shows an additional $100bn of global costs linked to extreme weather events - such as floods, heatwaves and droughts - can be expected through to 2040 alone.
It also draws on an academic study cited by Schroders among others, which uses a "conservative" projection to suggest the global economy would face estimated losses in income of more than $9.5trn a year with 3C of warming, rising to over $23trn at 4C of warming.
"The ripple effect of physical impacts of climate change already with us is also clear," IIGCC said.
"The high-profile bankruptcy of US utility PG&E - directly linked to the worst wildfires in California's history - exemplifies the knock-on impacts of a changing climate, which companies and investors can expect to become more common."
The new guidance aims to help investors better understand the investment implications that result from the physical impacts of climate change; take practical steps to identify, assess and manage climate-related physical risks across their portfolios; identify ways to invest in solutions that support greater resilience to climate change and protect existing investments; and draw on additional available tools and data sources to identify and assess specific risks, and opportunities, across different asset classes.
IIGCC chief executive Stephanie Pfiefer said: "Investors have no time to lose in understanding and acting on exposure to the physical risks of climate change.
"The impacts of the climate crisis are already being felt and set to become far more severe. A focus on resilience can help protect portfolios and strengthen returns, while enabling communities and the economy as a whole to better adapt to climate change."
The reports also highlight a compelling business case for enhancing the climate resilience of portfolios. They stress how adaptation-related investments can minimise volatility and the risk of losses associated with escalating climate impacts.
"Such an approach may also offer attractive rates of return and high benefit to cost ratios," the IIGCC noted.
"Research from the Global Commission on Adaptation has shown that investing $1.8trn (£1.46trn) globally over the next decade across five types of investment project - covering infrastructure to crop production - could generate $7.1trn in total net benefits."
Acclimatise chief executive John Firth said it "pays to be prepared".
He added: "The investors that can act now to both manage physical climate risks and grasp the opportunities to invest in resilience stand to be in the most secure position in the long-term," he advised. "This guidance acts as a first step to achieving this."
This follows the Pensions and Lifetime Savings Association's (PLSA's) launch of a climate forum earlier this week inviting pension schemes, the wider financial services industry, the public and stakeholders to give their views on the practical ways the retirement savings sector can address climate risk.
PLSA chair Richard Butcher is set to deliver a series of online roundtables from next month which will give pension schemes a "structured forum to discuss ideas, solutions and barriers to the pension industry operating in ways which have a positive impact in helping the UK achieve its Paris Climate Agreement commitments."
Butcher added: "As stewards of trillions of pounds of people's savings, pension schemes have a duty to ensure that members' money is managed responsibly.
"The PLSA is rightly proud of its efforts to encourage the pension industry to prioritise climate risk to date. With the engagement this work has brought, and new climate regulations in force, I am excited to be getting the opportunity to discuss with scheme CEOs, CIOs, trustees and anybody else to turn enthusiasm into action and take the agenda further."
Meadnwhile, institutional investors are making slow but positive progress towards embracing ESG and climate-conscious investment attitudes. Research in the Morgan Stanley Sustainable Signals Survey - published today (28 May) - found asset owners embracing sustainable investing adoption had increased from 10% to 80% between 2017 and 2019, while 57% can envision a time when they will soley allocate to investment managers with a formal approach to ESG.
This article was first published by Professional Pensions' sister title Business Green.
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