Reports show investors face mounting risks, especially as
new carbon regulations are proposed at the United Nations Climate Change
Conference. As world leaders meet in Paris to discuss climate change, asset
managers and consultants are offering guidance on how institutional investors
can tackle sustainability—and why it’s so important that they do. Cambridge
Associates and Hermes Investment Management both released reports on how to
mitigate climate risk in a portfolio, warning of harm that could come to
investments should those risks not be taken seriously.
Cambridge Associates reported climate change could directly
hurt long-term portfolios through extreme weather events, which could destroy
property, or changing weather patterns, which might disrupt supply chains.
Additionally, policy and regulatory responses to climate change could impose
higher costs on sectors such as fossil fuels, utilities, transportation, and
In particular, Hermes warned the ongoing COP21 conference in
Paris will result in new regulations regarding carbon emissions that impose
increasing costs on the heaviest emitters. To manage these risks, both
organizations said managers need to be aware of climate risks in their
portfolios, and incorporate those risks into investment decisions.
Additionally, Cambridge Associates recommended that investors advocate for more
transparency and reporting on climate risk metrics.
Other suggestions included proactive hedging via low-carbon
strategies and policy-level exclusion of fossil fuel and other sectors.
However, the consulting firm said investors should consider opportunity costs
before changing asset allocation strategies to protect against risk.
Rather than just focusing on risks, Cambridge Associates and
Hermes both advised investors to consider the opportunities afforded by
sustainability. Renewable infrastructure, clean transportation, energy efficiency,
and green technology are sectors that will provide structured and
regulation-driven growth in the coming years, they said. One such group already
planning to take advantage of these opportunities is the newly formed Breakthrough
Energy Coalition. The 28-member coalition, led by Microsoft founder Bill Gates
and including the University of California, announced at the Paris summit its
intention to bankroll investments in clean energy.
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