16 February 2011

What Does Climate Change Mean for Investment Portfolio Risk?

Mercer, a global financial services firm, has just issued a major new report on the risks of climate change on investment portfolios.  The report was produced with the help of the LSE Grantham Institute and the World Bank.

A Reuters news story on the report says the following:
Climate change could put trillions of investment dollars at risk over the next 20 years, a global study released on Wednesday said, calling for pension funds and other investors to overhaul how they allocate funds.
However, when you actually take a look at the report, you find that it does not say what Reuters (or others) says it does .  The report presents several top line conclusions about portfolio risks over the next 20 years.

First, climate policies might have a large financial impact on portfolio risk:
[C]limate policy could contribute as much as 10% to overall portfolio risk: Uncertainty around climate policy is a significant source of portfolio risk for institutional investors to manage over the next 20 years. The economic cost of climate policy for the market to absorb is estimated to amount to as much as approximately $8 trillion cumulatively, by 2030. Additional investment in technology is estimated to increase portfolio risk for a representative portfolio by about 1%, although global investment could accumulate to $4 trillion by 2030, which is expected to be beneficial for many institutional portfolios.
Second, what about the risks caused by actual changes in the climate? (emphasis added)
The economic model used in this study excludes physical risks of climate change which are not consistently predicted by the range of scientific models, and primarily for this reason concludes that, over the next 20 years, the physical impact of changes to the climate are not likely to affect portfolio risk significantly. However, this does not imply the absence of significant (and growing) risk, as shown by recent climate-related disasters that investors need to monitor closely.
Thus, the risk to financial portfolios in the report is entirely due to climate policies and not the effects of "the physical impact of changes to the climate."  Of course, a news story that begins -- "Climate change policies could put trillions of investment dollars at risk" -- doesn't really have the same ring to it.


  1. Mercer is a financial consulting firm specializing in risk management. When a consulting firm writes this kind of report its done to attract clients. It's therefore a form of advertising/PR. The press release accomplished its mission apparently. I would not put too much stock in it.

  2. So the medecine will hurt more than the disease...

  3. Roger:
    "a news story that begins -- "Climate change policies could put trillions of investment dollars at risk".
    I think you did not intend to include "policies" in the quote.

  4. Julian Simon -- "You can always make news with doomsday predictions, but you can usually make money betting against them"

  5. I was involved about 9 months ago in a SWOT analysis for my organization. Of the list of threats we were supposed to analyze, not one person in the room thought that climate change was a significant issue over the next ten to twenty years. I put forward a case that climate policy was a threat, even though climate change wasn't, but nobody would buy even that much.

  6. Is it possible? A media organization mis-representing a news report to falsely claim an adverse impact of CO2 when it in fact says the opposite? Why, I never.
    /sarc off

  7. Brian,
    Why not?
    'We have met the enemy and he is us' is as true today as it was when Pogo said it.
    I like the way the meaning is summed up:
    "The nine words form the title and theme of a Pogo motion picture currently in work, believing as I do that we are all of us responsible for our myriad pollutions, public, private and political.”

    I think Walt would have seen CO2 obsession for what it is: A public mania dripping with opportunities for ridiculous counter productive policies for politicians and their pals to take advantage of at our expense.

  8. Frontiers of Faith and Science

    Thanks. Your reference to the origin of the Pogo quote caused me to re-read, and I think I now get it.

    Roger was not quoting Reuters verbatim and his insert of “policies” to the Reuters quote was precisely intentional. By doing so, however, I am not sure whether Reuters is being given more credit than it deserves for its lack of focus on “policies” in the Mercer report. Perhaps, there is no agenda and it is nothing more than collective noise from the herd.