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April 02, 2010
Study to Evaluate Climate Change Impact Across Asset Classes
    by Robert Kropp

Mercer joins with institutional asset owners and investors to launch a study exploring the impact of climate change on asset allocation.


During last December's United Nations Climate Change Conference (COP15), the United Nations Principles for Responsible Investment (PRI) published a letter asking for clear recognition “of the important role that capital markets, institutional investors and private finance, will play if the global community is to deliver the needed transformation to a low–carbon and resource-efficient global economy.”

At the time, Paul Clements-Hunt, Head of the
United Nations Environment Program Finance Initiative (UNEP FI), told SocialFunds.com, "85% of financing for climate change mitigation will come from private investment.”

Following last month's announcement by
Mercer that, along with 14 institutional asset owners and investors from around the world, it has launched a study of the potential impact of climate change on asset allocation, SocialFunds.com spoke with Craig Metrick, US Head of Responsible Investment at Mercer.

Asked if he agreed with Clements-Hunt's analysis, Metrick said, "The number seems reasonable under certain potential scenarios."

"This project actually predates the letter," he continued, "As there was a sense among institutional investors that there was a potential for impact on strategic assetologies. There's been a lot of talk about private equity, infrastructure, and emerging markets."

Joining Mercer and the 14 institutional investors for the project are the
Carbon Trust and IFC. Research into the economic and financial impacts of climate change scenarios will be provided by the Grantham Research Institute on Climate Change and Vivid Economics.

The institutional asset owners and investors involved in the study include the US-based
California Public Employees' Retirement System (CalPERS), California State Teachers' Retirement System (CalSTRS), and the Maryland State Retirement and Pension System.

According to Mercer, the study "will consider a variety of climate change scenarios and map the potential risks and opportunities of these outcomes for returns on asset classes in different regions over the periods until 2030 and 2050."

Metrick said, "The scope of this project, looking out 20 or 50 years across the asset classes, hasn't been done before."

"There's a realization that institutional investors are an important source of capital," he continued. "Our study will consider not only the effect of climate change on asset allocation strategies, but the effect of those strategies on climate change as well."

Mercer has compiled a number of studies in the past on the impact of climate change on investment. In March 2009, it collaborated with the
Carbon Disclosure Project (CDP) in a survey of institutional investors that found that respondents who factor climate change information into investment decisions indicated that climate change is an important factor.

An April 2009 collaboration with IFC resulted in a
study of social investment in emerging markets, which found that investment in sustainable investment funds in emerging markets has grown more than fivefold between 2003 and 2008.

According to Mercer, the new report "should encourage financial intermediaries, such as investment managers, consultants and research firms, to develop tools, products and services that facilitate appropriate responses to climate risk scenarios." The study is likely to include recommendations for policy-makers and industry groups, despite the limited attention given to the impact of private investment at COP15.

Greg Radford, IFC Director for Environment and Social Development, stated, "The importance of private sector capital cannot be understated in the fight against climate change. Yet, mobilizing those funds requires clear understanding of the climate risks and opportunities to help pension funds allocate capital appropriately."

Mercer expects the report to be publicly available in late 2010. Metrick said, "Mercer's clients will receive reports tailored to their specific asset allocation strategies."

"The public report will have broad conclusions," he continued. "The project is looking at a number of potential scenarios regarding the reactions of government and the world to climate change. The report will assess the impact of that on specific asset classes and regions, looking at both adaptation and mitigation."

 

 
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