Few issues are driving change in investor portfolios as the speed of our changing climate. After years of slowly climbing up investors’ agendas, the impact of climate change – both on the world and their portfolio – is now a critical issue for many. Not only are investors becoming more aware of their responsibility as allocators of capital, but the changing regulatory and political landscape around the issue may also putting pressure on their long-term returns.
In recent years, the need to transition to a zero-emission economy has come into acute focus from governments and multi-national organisations. Most of the world’s largest countries have either pledged to meet ambitious carbon-reduction targets or put themselves on the path towards it. To achieve these ambitions, however, much needs to be done, and while governments can issue policies to change their citizens’ behaviour, the real change needs to come from industry.
Integral to the net-zero plan is the transition to clean energy. Instead of burning fossil fuel to generate power, industry in all sectors needs to find a new, sustainable source – and quickly. Instead of trying the “carrot” approach with companies of all sizes, most governments are opting for a much quicker approach, using the “stick” of regulation. Swathes of new rules are being churned out around the world, often forcing companies, in some instances, to radically reassess their business models.
From the clearest targets, such as fossil fuel producers, to companies that appear to be minimally impacted by net-zero ambitions, almost every business is likely to have to analyse, report and address their carbon footprint in the very near future. While some will need just light tweaking to meet net-zero requirements, others will need to fundamentally reassess how they operate, and to facilitate this upheaval there is huge technological disruption happening in the energy and utilities sectors.
First, they want to understand the potential downside risks they face as a result of the transition. Will the companies they may have held for several years continue to produce a healthy return? How can they get to grips with how new regulation may impact the company’s business model? How long might a company have before it needs to radically change – and by then, could investors have sold out of their holdings?
The answers to these questions are difficult to ascertain, even when addressing the most obvious targets. The answers are harder still when considering companies that, at first glance, may not seem to be impacted at all.
The second challenge is to find the companies that could generate sustainable and green revenues and replace the companies that will fail to do so over the long term. Opportunities abound when disruption comes to the fore, and as investors begin to unwind positions that no longer work for them, they may have capital to allocate.
In our view, it is possible to both respond to the urgency climate change is creating and find opportunities that will likely benefit investors over the long term. The first step is to undertake climate scenario analysis, the second to create a transition action plan that suits an investor’s governance approach and framework.
At Mercer, we have developed an Analytics for Climate Transition (ACT) solution, which provides investors with information they need to construct climate-resilient portfolios over a multi-year timeframe. This solution helps investors analyse, address and adapt their portfolio with the goal of delivering acceptable returns, whilst also building in climate resiliency.
Climate change is happening, and it is impacting investor portfolios. Ignoring it not only disregards an investor’s responsibility as an allocator of capital but potentially runs the risk of failing to meet investment objectives too.
To help achieve the ambitious targets set to avert a climate disaster, it is up to everyone - investors, companies, governments, individuals – to make a clear and rapid change and we believe we have the tools, data and analytics to help investors make the necessary decisions.
We believe now is the time to transition institutional portfolios and execute on the plan.
Mercer’s highly anticipated Forums bring together experts, asset managers and asset owners to discuss current and emerging investment themes. Hosted by regional teams in collaboration with our global experts, the Asia Pacific Forum will focus on challenges and opportunities specific to the Asia Pacific region, in the context of a rapidly changing world.
References to Mercer shall be construed to include Mercer LLC and/or its associated companies.
© 2021 Mercer LLC. All rights reserved.
This content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Mercer's prior written permission.
Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications
This does not constitute an offer to purchase or sell any securities.
The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed.
For Mercer’s conflict of interest disclosures, contact your Mercer representative or see http://www.mercer.com/conflictsofinterest.
This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Mercer provides recommendations based on the particular client's circumstances, investment objectives and needs. As such, investment results will vary and actual results may differ materially.
Information contained herein may have been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission or inaccuracy in the data supplied by any third party.
Investment management and advisory services for U.S. clients are provided by Mercer Investments LLC (Mercer Investments). Mercer Investments LLC is registered to do business as “Mercer Investment Advisers LLC” in the following states: Arizona, California, Florida, Illinois, Kentucky, New Jersey, North Carolina, Oklahoma, Pennsylvania, Texas, and West Virginia; as “Mercer Investments LLC (Delaware)” in Georgia; as “Mercer Investments LLC of Delaware” in Louisiana; and “Mercer Investments LLC, a limited liability company of Delaware” in Oregon. Mercer Investments LLC is a federally registered investment adviser under the Investment Advisers Act of 1940, as amended. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Mercer Investments’ Form ADV Part 2A & 2B can be obtained by written request directed to: Compliance Department, Mercer Investments, 99 High Street, Boston, MA 02110.
Certain regulated services in Europe are provided by Mercer Global Investments Europe Limited and Mercer Limited.
Mercer Global Investments Europe Limited and Mercer Limited are regulated by the Central Bank of Ireland under the European Union (Markets in Financial Instruments) Regulation 2017, as an investment firm. Registered officer: Charlotte House, Charlemont Street, Dublin 2, Ireland. Registered in Ireland No. 416688. Mercer Limited is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 984275. Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU.
Investment management services for Canadian investors are provided by Mercer Global Investments Canada Limited. Investment consulting services for Canadian investors are provided by Mercer (Canada) Limited.