International Centre for Pension Management

This article presents the results of a large-scale research project analyzing the potential impact of climate change on investors’ portfolios. This collaborative endeavor was led by Mercer and included 14 global institutional investors representing in excess of $2 trillion in assets under management, together with the International Finance Corporation and the Carbon Trust. The article summarizes four climate change scenarios through a factor risk framework to measure the different sources of investment risk. Institutional investors can use this framework to enhance their understanding of climate-related investment risks and opportunities across many asset classes and regions. One key finding is that risks and uncertainty around climate policy can account for as much as 10%of total fund risk in a pension fund with a hypothetical strategic asset allocation. The authors also suggest that some asset classes are more sensitive to climate change in terms of both the risks and the opportunities that need to be proactively managed, including infrastructure, private equity, real estate, sustainable listed equities, agricultural land, and timberland.