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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.

Alternative Data
Portfolio Climate Risk
Hidden Climate Risks
Emerging Green Investments

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.

Page 40

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Explore more chapters

Climate change is today's reality

Feb 11, 2021

With the next 15 years of climate change already determined, unprecedented variability in weather is assured.

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Climate Change is a major macro factor

Feb 11, 2021

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.

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How are markets pricing in climate risk?

Feb 11, 2021

Climate risk will increasingly be reflected in market prices, leading to a potentially dramatic repricing in a range of sectors, assets, and companies.

Read More
Investment Implications by Asset Class

Feb 11, 2021

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.

Read More

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