Megatrends

PORTFOLIO IMPLICATIONS

Weathering Climate Change | Chapter 5

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INVESTORS CAN NO LONGER IGNORE CLIMATE CHANGE IN THEIR PORTFOLIO

Climate change presents a whole new set of investment risks and opportunities that are difficult to capture and empirically analyze using historical data and linear models. In this chapter, we present an action plan for institutional investors considering the holistic impact of climate change across their portfolios.

Use alternative data sources and techniques to better understand cross-portfolio climate risk

To fully assess the climate exposure in their portfolios, CIOs will need to rely on unconventional data sources – such as updated flood maps and satellite imagery – and methodologies. Carbon emissions data has become more available in recent years – though it remains highly unstandardized.

Evaluate different approaches to integrate climate into portfolio risk management

  • Conduct portfolio risk analysis of known physical and transition risks to identify vulnerabilities across regions and asset classes.
  • Employ targeted climate stress tests at the asset class level for a specific policy change or speculative physical risk.
  • Evaluate broad climate scenario stress testing as data and modeling improves and results become more granular.

Look beyond obvious physical risks to uncover embedded vulnerabilities across the portfolio

Climate change has the potential to cause significant disruptions in global supply chains. Industries such as pharmaceuticals and semiconductors face underappreciated climate risk.

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Climate analytics firms can provide some portfolio-level metrics so CIOs can get a feel for their embedded carbon exposure.

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