On June 13, 2011, three large climate change investor groups issued a joint report, prepared by Mercer, analyzing global investor actions, strategies, and policies related to climate change risks and opportunities. The Report, entitled "Global Investor Survey on Climate Change: Annual Report on Actions and Progress 2010," analyzes a wide range of investment management issues as they relate to potential climate change risks and presents key findings regarding strategies, trends, and challenges for asset owners and managers.
As summarized below, the Report concludes that the trend of heightened investor attention to climate change risks and opportunities continues, although in differing patterns by region. Additionally, increased investor analysis and action has occurred despite continuing challenges faced by asset owners and managers in quantifying and predicting climate change risks and opportunities, due to data gaps, data ambiguities, and regulatory uncertainty.
Three Climate Change Investor Groups Lead Research Effort. The wide variety of asset classes managed by the three investor groups that sponsored the Mercer Report, together with distinct regional differences between investors represented by each, allowed a broad look at the issues, as well as by region around the globe. To better place the survey findings into context, the following briefly describes each of the participating groups, with links to each group's web site, where additional information on the group's mission, agenda, and policies can be found:
- Based out of Europe, the Institutional Investors Group on Climate Change has 70 members representing more than $10 trillion in managed assets.
- Based out of North America, the Investor Network on Climate Risk provides support for climate-related investment practices and disclosure policies, and it is coordinated by CERES, one of the leaders of the activist investor movement. INCR's membership represents more than $10 trillion in managed assets.
- Based out of Australia/New Zealand, the Investor Group on Climate Change serves both to educate investors on climate change risks and to encourage awareness of these issues in investment decisions.
The range in types of assets and regions covered by these groups created a unique opportunity for Mercer to evaluate investor policies and patterns on a global scale, but with regional comparisons as well.
Findings Show Continued Trend of Heightened Investor Focus on Climate Change Issues. The study included survey results from 100 asset owners and managers with collective assets of more than $12 trillion, with most respondents from Europe and Australia/New Zealand, and about 15 percent based in North America. The key findings reported by Mercer include the following:
- Investor Focus: Globally, 87 percent of surveyed asset managers and 98 percent of surveyed asset owners view climate change issues as "a material investment risk/opportunity" in their investment portfolios. (Report at 13) Consistent with these findings, Mercer reports that the majority of asset managers and owners now include provisions for climate change risk in their investment policy. Globally, investors identified real estate as the asset class facing the greatest potential impact of climate change risks on investment returns, due to extreme weather risks, as well as energy and water concerns.
- Role of Public Policy: The greater regulatory certainty in Europe and Australia/New Zealand (for example, established carbon pricing and markets, providing predictability in the low-carbon economy) resulted in heightened integration of climate change analysis in investor decision-making in these regions. Not surprisingly, in regions with a less predictable regulatory atmosphere, investors often found it hard to develop methods for analyzing future climate change risks and future investment opportunities. As Mercer had concluded in an earlier study, "climate policy uncertainty could contribute to as much as 10 percent of the risk for a representative portfolio over the next 20 years," indicating that the very uncertainty that makes risk analysis difficult further exacerbates the overall investment risk. (Report at 21) Perhaps due in part to this relationship between uncertainty and risk, the Report found that 85 percent of surveyed asset managers and 91 percent of surveyed asset owners engaged in review of at least one issue related to climate change policy in 2010. (Report at 22)
- Key Challenges: Mercer finds that the key challenge to investor analysis and understanding of investee climate change risks and of climate change-related investment opportunities lies in investors' lack of knowledge. This incomplete understanding is driven, according to Mercer, by data gaps, climate change data ambiguities, and a difficulty quantifying how climate volatility affects a particular asset class. The Report found that asset owners/managers overcome these challenges through greater participation in investor groups (such as the study sponsors), education of investors, and greater communication with investees regarding climate change issues.
The full Report offers detailed explanation of these general conclusions and provides additional insight on the trends in investor review and quantification of climate change risks in investment decisions. Mercer's findings in particular offer insight for investee representatives, such as corporate investor relations departments, on potential avenues for improving investor confidence regarding the company's identification and management of potential climate change risks.