The impacts of climate change and lack of international policy coordination could cost institutional investors trillions of dollars over coming decades, with Australia potentially being one of the worst hit countries if international response to carbon emission mitigation response is strong, according to a report written by investment consultants Mercer.
Institutional investors could be hit by economic costs of carbon emission policies up to US$8tr by 2030, according to Climate Change Scenarios – Implications for Strategic Asset Allocation . If the international community’s mitigation response to carbon emission is strong, the industries that would be worse off include fossil-fuel industries such as coal mining, crude oil and gas extraction, petroleum refining and gas utilities, and carbon-intensive primary and manufacturing industries, including mining, most electrical power utilities and chemicals. Under that scenario, Australia would rank as one of the five countries most likely to experience the greatest shift in demand and be worst off, along with the US, Saudi Arabia, South Africa and Canada.
Helga Birgden, head of responsible investing for Asia Pacific at Mercer said the report highlights threats and opportunities for investors in Asia.
“This region in particular is vulnerable to environmental impacts and is therefore exposed to climate change, as a mega theme,” she said. “On the flip side, our region is leading developments such as in China and East Asia in low carbon technology which creates investment opportunities and the potential for economic transformation.”
The report examined four possible scenarios as a result of climate change and concomitant policy changes to plan for the attendant risks and opportunities. Mercer outlines a framework for analyzing climate-related investment risks and opportunities. The so-called “TIP Framework” “estimates the rate of investment into low carbon technologies (T), the impacts (I) on the physical environment and the implied cost of carbon resulting from global policy (P) developments…”
Mercer also found that if institutional investors increase allocation to ‘climate sensitive’ assets, they can help mitigate risks and capture new opportunities.