Traditional portfolio construction considers geo-political and economic risks. Incorporating climate change risk has proven difficult given the uncertainty regarding global and regional policy to reduce emissions.
Over the years we have seen several attempts to develop a framework to guide investors on how to include climate change risks within portfolio risk management. The latest, actuarial consultant Mercer’s report, gives a good insight into the key issues when assessing climate change risks and opportunities.
Highlighting impact of climate policy
Mercer’s report suggests that over the next 20 years climate change could contribute up to 11% of portfolio risk. Surprisingly, Mercer estimates this is almost entirely due to climate policy risk (10% of the 11%).