Climate change is today's reality
With the next 15 years of climate change already determined, unprecedented variability in weather is assured.
Summary of Portfolio Implications
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.
Monitor emerging “green” investments for viability
A range of new “green” investment opportunities are emerging to fund climate-related activities and investments (e.g. green bonds, solar ABS, and carbon offset trading). Many of these green investments are currently not viable opportunities for institutional investors. These nascent markets may offer sophisticated investors a unique opportunity to shape these new markets and the investment structures.
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Climate Change is a major macro factor
Investors will be on the front line of this battle, making capital allocation decisions that will directly influence the transition to a low-carbon economy.
How are markets pricing in climate risk?
Climate risk will increasingly be reflected in market prices, leading to a potentially dramatic repricing in a range of sectors, assets, and companies.
Investment Implications by Asset Class
Climate change is not just a risk factor in the investment framework but an opportunity for active alpha generation along the path to a greener economy.
