Mercer: Investing in a Time of Climate Change – The Sequel

Commissioned by Mercer, ‘Investing in a Time of Climate Change – The Sequel’ presents the results of climate scenario analysis assessing the effects of climate related physical risks and the transition to a low-carbon economy.

The report looks at the consequences on the investment industry and what steps they should take to ensure the climate resilience of their portfolio assets.

We used the E3ME macroeconometric model to quantify the transition and physical risk impacts associated to climate scenarios, considering three scenarios, 2⁰C, 3⁰C and 4⁰C temperature increases. We assessed the investment opportunities presented by a low-carbon transition.

The analysis highlighted the role of four risk factors — policy and technology to capture transition and resource availability and impact of catastrophes to capture physical damages.

Key findings:

• The results emphasise the physical damages risks and why a below 2⁰C scenario is most beneficial, and the 4⁰C and 3⁰C scenarios are to be avoided, from a long-term investor perspective
• Transition opportunities emerge from a 2⁰C scenario, with transition now expected to be a benefit from a macroeconomic perspective.
• Opportunistic investors can target investment in the many mitigation and adaptation solutions required for a transformative transition.
• Expected annual return impacts remain most visible at an industry-sector level, with significant variations by scenario, particularly for energy, utilities, consumer staples and telecoms.