Additional press contacts:
- Environment Agency
Head of Pension Fund Management
+44(0)117 934 5094
- The Grantham Research Institute on Climate Change and the Environment
Director of Policy and Communications
+44 207 106 1236
Communications Officer, IFC Business Advisory Services - Vice Presidency Unit
+1 (202) 458-4662
Maryland State Retirement and Pension System
+410 625 5600
- Ontario Municipal Employees Retirement System
VP Corporate Communications
- VicSuper Pty Ltd
+61 (0) 3 9667 9701
- Carbon Trust
+44 (0) 20 7832 4805
Key Questions and Answers
1. Which investors were involved in this project?
The participating investors, representing more than $2 trillion in AUM included: AP1 (Sweden), APG (Netherlands), AustralianSuper (Australia), British Columbia Investment Management Corporation (Canada), British Telecom Pension Scheme (UK), CalPERS (US), CalSTRS (US), Environment Agency Pension Scheme (UK), Government of Singapore Investment Corporation (Singapore), Maryland State Retirement and Pension System (US), Norwegian Government Pension Fund, Ontario Municipal Employees Retirement System (Canada), PGGM (Netherlands) and VicSuper Pty Ltd (Australia).
2. What is the “TIP Framework”?
TIP is a framework developed by Mercer as part of the project that can be used by institutional investors to identify and manage the systemic risks and investment opportunities arising from climate change, based on low carbon technology (T), physical impacts (I) and climate policy (P). It is a tool for increasing understanding of the potential investment impacts of climate change, the sensitivity of asset classes and geographical regions to these impacts, and the uncertainties that remain.
The technology factor is broadly defined as the rate of progress and investment flows into low carbon/efficiency-related technology which are expected to provide investment gains overall. The impacts factor measures the economic cost of changes to the physical environment, health and food security that will have a negative impact on investments overall. The policy factor measures the implied cost of carbon due to regulatory measures and /or emissions trading schemes and the resulting level of carbon emissions. The investment cost/benefit of climate policy is a function of how quickly the policy action is taken (where delayed action increases investment costs), the level of emissions associated with each scenario and the resulting cost of carbon (where a higher price that is not fully anticipated by the market will be negative for investments).
3. Can the framework be applied to all asset classes?
The potential impact on six major asset classes - namely equities, fixed income, commodities (specifically agriculture land, timberland and carbon), real estate, private equity and infrastructure - have been factored into the framework to derive a range of potential outcomes for investors. The TIP framework could be expanded to apply to other asset classes.
4. What were the “scenarios” used in the research?
Four different climate change scenarios were developed as the basis for assessing their potential financial impact on asset classes (see table below).
Key features and potential outcomes of the climate scenarios to 2030
||Global policy response
||Carbon cost (in 2030)
||Emmissions levels (not to 2030)|
Divergent and unpredictable
Framework agreed to succeed Kyoto Protocol
Targets announced of medium ambition
|Cost of carbon $110/tCO2e in all countries in this study (EU, US, China/East Asia and Japan) except india/South Asia and Russia
||50 Gt CO2e 2 emissions per year in 2030 (equivalent to -20% from BAU)
(Close second in likelihood)
Late and led by hard policy measures
Strong mitigation, but only after 2020 when sudden drive by major emitting nations results in hasty agreement
Very little support to vulnerable regions on adaptation
|Cost of carbon $15/tCO2e to 2020 then dramtic rise to $220/tCO2e globally (not unanticipated by the market)
||40 Gt CO2e emissions per year in 2030 (equivalent to -40% from BAU)
(Much less likely)
Strong, transparent and internationally coordinated action
Generous support to vulnerable regions for adaptation
|Cost of carbon £110/tCO2e globally (anticipated by the market)
||30 Gt CO2e emissions per year in 2030 (equivalent to -50% from BAU)
|Business as usual. No mitigation beyond current efforts
Very little support to vulnerable regions for adaptation
|Cost of carbon $15/tCO2e limited to the EU ETS, regional schemes and implicit cost of carbon estimates
||63 Gt CO2e emissions per year in 2030 (equivalent to business as usual)
Source: Grantham Research Institute LSE/Vivid Economics
5. What were the key findings of the report?
The key findings include:
- Technology investments to achieve a low carbon transformation could accumulate to as much as $5 trillion by 2030.
New technologies will create investment opportunities in efficiency improvements, renewable energy, biofuels, nuclear and carbon capture and storage. The low carbon transformation process will also undermine the value of some existing investments that fail to adapt.
- Costs of climate impacts on the physical environment, human health and on food security could accumulate to $4 trillion by 2030.
Some investments may be directly affected by rising risks of climate change related events, such as infrastructure and coastal zone property (floods and storm damage), water availability (drought and flood risk) with knock on impacts on agriculture and health. Physical impact costs rise the greater the delay and the less well-coordinated the policy response.
- Climate policy changes could increase the cost of carbon emissions by as much as $8 trillion by 2030.
The cost of carbon could be as high as $220/tC02e by 2030, with the cost increasing the longer the policy delay and the less well-anticipated and coordinated the policy action. Mercer calculates that climate policy risk currently contributes 10% to long-term portfolio risk for a representative portfolio, with the risk increasing under scenarios of delayed climate policy action.
- Increasing exposure to “climate sensitive” assets can help to capture the upside and protect against the downside risks of climate change at the total portfolio level.
Climate sensitive assets include infrastructure, private equity, real estate, timberland, agriculture land, carbon, broad and sector focused sustainable equities and efficiency/renewable listed/unlisted assets.
- EU and China/East Asia expected to emerge as “leaders”.
The regions that are best placed to lead the climate change transformation are those that pre-emptively find alternative sources of energy, improve efficiency, reduce carbon emissions and invest in new technology. Indicators of current and future investment flows and policy measures suggest that the ‘leaders’ are likely to be the EU and China /East Asia (with the caveat that the regions examined in this study were limited to those where comparable data was available across the TIP factors, notably the US, EU, China/East Asia, India/South Asia, Japan and Russia).
6. What advice will Mercer be giving to its clients as a result of this report?
Mercer will be working with clients to review their portfolios and provide an assessment of climate risk and potential investment opportunities. Mercer will also support clients in developing a range of policies and processes to implement the results of portfolio reviews, including the selection and evaluation of appropriate investment products that might help to capture the opportunities and mitigate the risks around climate change. Over time further services will be developed to support this work.
A series of presentations and seminars relating to the ‘Climate Change Scenarios – Implications for Strategic Asset Allocation' study can be found by visiting Mercer’s Responsible Investment website.
2 Gt refers to gigatone which = 1,000 million tonnes of CO2e emissions