Institutional Investors Group on Climate Change offers members detailed advice on how to integrate climate risks and opportunities into investment processes
In the same week as the boss of one of the UK's top energy companies warned the economic impact from climate change could prove to be worse than that from coronavirus, a group of top investors has set out new guidance for how investment firms can manage escalating climate risks.
The Institutional Investors Group on Climate Change (IIGCC) has today released two new reports that set out how investors and asset managers can integrate the risks and opportunities presented by the physical impacts of climate change into their investment processes.
The reports - which have been developed with specialist consultants Acclimatise and Chronos Sustainability, and support of the Universities Superannuation Scheme - draw on contributions from a number of leading investors, many of whom have stepped up climate risk management efforts in recent years.
The IIGCC said the reports aim to build on growing investor engagement with the systemic risks presented to investment portfolios presented by climate change and the transition towards cleaner technologies and infrastructure.
The guidance highlights how research from Cambridge University shows an additional $100bn of global costs linked to extreme weather events - such as floods, heatwaves and droughts - can be expected through to 2040 alone.
It also draws on an academic study cited by investment giant Schroders among others, which uses a "conservative" projection to suggest the global economy would face estimated losses in income of over $9.5tr a year with 3C of warming, rising to over $23tr at 4C of warming.
"The ripple effect of physical impacts of climate change already with us is also clear," IIGCC said. "The high-profile bankruptcy of US utility PG&E - directly linked to the worst wildfires in California's history - exemplifies the knock-on impacts of a changing climate, which companies and investors can expect to become more common."
The new guidance aims to help investors better understand the investment implications that result from the physical impacts of climate change; take practical steps to identify, assess and manage climate-related physical risks across their portfolios; identify ways to invest in solutions that support greater resilience to climate change and protect existing investments; and draw on additional available tools and data sources to identify and assess specific risks, and opportunities, across different asset classes.
"Investors have no time to lose in understanding and acting on exposure to the physical risks of climate change," said Stephanie Pfeifer, CEO at IIGCC. "The impacts of the climate crisis are already being felt and set to become far more severe. A focus on resilience can help protect portfolios and strengthen returns, while enabling communities and the economy as a whole to better adapt to climate change."
The reports also highlight a compelling business case for enhancing the climate resilience of portfolios. They stress how adaptation-related investments can minimise volatility and the risk of losses associated with escalating climate impacts.
"Such an approach may also offer attractive rates of return and high benefit to cost ratios," the IIGCC notes. "Research from the Global Commission on Adaptation has shown that investing $1.8tr globally over the next decade across five types of investment project - covering infrastructure to crop production - could generate $7.1tr in total net benefits."
John Firth, CEO at Acclimatise, said it "pays to be prepared". "The investors that can act now to both manage physical climate risks and grasp the opportunities to invest in resilience stand to be in the most secure position in the long-term," he advised. "This guidance acts as a first step to achieving this."
The reports come just a day after the CEO of energy giant SSE, Alistair Phillips-Davies, warned a failure to tackle escalating climate risks could eventually have a greater economic impact than coronavirus.
SSE has this week written to British Prime Minister Boris Johnson setting out a "greenprint", which the company argues should shape the UK's economic recovery plans.
"Although not as immediately felt as those from coronavirus, the impacts from a failure to deal with climate change could be even greater," Phillips-Davies told the BBC. "That's why delivering on the UK's net zero emissions target by 2050, and 2045 in Scotland, is as important as ever."
SSE's plan sets out 15 policy proposals designed to deliver "extensive and efficient" electric vehicle charging infrastructure by 2025, build a net zero power sector by 2040, install 40GW offshore wind capacity by 2030 and targeting at least 75GW by 2050, upgrade UK buildings, and deliver new carbon capture and hydrogen industrial clusters.