OPTrust Reveals Climate Change Stress Test
Shows a 5.44 per cent drop in returns under most severe scenario.
February 1, 2017
Al Gore called climate change an inconvenient truth – a disruptive and disturbing outcome of years of industrial and economic expansion.
But for an increasing number of large investors, climate change is becoming part of a bigger vision – a thematic lens set to shape their investment decisions for decades to come.
This week OPTrust took a step to deepen the discussion large investors are having about climate change by releasing its own climate change scorecard – a Mercer report commissioned to assess and quantify the sensitivity of its investment portfolio to climate change risk.
The report shows the estimated return implications under four climate scenarios and risks factors over a 35-year time-period, with the most severe scenario causing a 5.44% drop in returns.
The impact of climate change varies considerably across asset classes – timber, real estate, agriculture and emerging market equities could benefit as temperatures rise by 2 percent – but they could begin to suffer under the most severe scenarios.
In my view, OPTrust has made a big step forward in advancing climate change disclosure – while Ontario now requires pension funds to disclose their approach to environment, social, and governance factors in their investment policy statements, their release of the Mercer reports is something other big pension investors – and asset managers – would do well to model.
Recommendations for the future
In addition to the Mercer report, OPTrust released its own position paper designed to deepen the discussion that asset managers and owners are having around climate change, including a list of barriers faced by investors seeking to address climate change in their portfolios. At the top of list is data which remains a huge problem despite the $100 trillion worth of support that has been put behind the Carbon Disclosure Project.
Another area for improvement is impact measurement – climate change scenario modeling that can help identify the biggest risks and the impact they could have for investors down the road.
You can read both reports here.