Mercer has published the sequel to its widely-cited 2015 “Investing in a time of climate change” report.
The underlying climate-economy model has been changed and extended the time horizon to 2100. The long-term return impacts continue to be implausibly low, but Mercer now do a better job of highlighting the modelling limitations (e.g. “the resulting magnitudes are likely to be significantly underestimated”) and encourage focus on the relative rather than absolute results.
The new report has two important additions:
- Short-term stress tests for exploring the impact of changes in market views. They illustrate two stress tests (sudden shift in likelihood of 2 and 4 degree scenarios) with portfolio impacts of -3% to +3% in less than a year.
- Extra asset classes for sustainable variants of listed equity, private equity and infrastructure. They show that switching 10%, 1% and 1% of a sample portfolio into these classes respectively returns c.0.2% pa more to 2030.
The report continues to consider asset impacts only, with no commentary on funding or covenant considerations.