If you believe that climate change is a real danger, your asset allocation should reflect your outlook, according to a new study by Mercer, the consulting company. There is no doubt that it will be a controversial recommendation from some quarters. Something related to climate change tends to stir debate on an item or for another, and so reviewing the matter concerning investment promises no less. Ready or not, it is time to examine the impact of climate change, for designing and managing portfolios, Mercer explains in "climate change scenarios for Strategic Asset Allocation"
The paper argues that climate change increases investment risk and asset allocation strategies must adapt accordingly. The uncertainty surrounding policy regulations and economic impact of climate change inspires "new approaches for building portfolios. The analysis is a joint effort Mercer and more than a dozen institutions, including the pension system in California public employees (CalPERS) and the international finance company.
Written for an audience with the institution, the report introduces a new framework for investment based on three key variables, which can be summarised as:
? Technology: the rate of growth and opportunities for investment in low carbon technologies
? Impact: to the extent that changes in the investment appeal of the natural environment
? Policy: the implied cost of carbon and emissions levels due to policy changes
These so-called variables TIP "could contribute and 10% in the overall portfolio risk," provides for the Mercer analysis. Even so, the equity risk premium expected to dominate most institutional portfolios. Mercer believes that nearly three-quarters of the contribution of risk in the portfolio "Default" will come from equity markets.
The study which advise on to manage climate change risks properly, "institutional investors must consider diversification of sources of danger and not to the entire traditional asset classes." this is an increasingly familiar is, of course, by analysis of so-called agent. For example, it is now common to view risk equity in terms of three factors which consisted of a broad market, style (growth vs. value) and betas size (uppercase). There, of course, many more factors to consider and new paper Mercer argues in favour of a risk analysis throughout the other dimension.
The practical effect, according to the Bible increases portfolio allocations TIP factors. An example: the study notes:
a typical portfolio seeking a return of 7% could manage the risk of climate change by approximately 40% of its assets are maintained in a climate-sensitive assets (this includes opportunities in a wide range of assets, including infrastructure, real estate, private equity, agriculture land, timberland and sustainable listed/unlisted assets). Some of these sensitive investment climate might traditionally be considered most at risk, on an autonomous basis, but it appears in the report you selected investments in climate-sensitive assets, with particular emphasis on those who can adapt to a low carbon environment, it may actually reduce risk portfolio in some scenarios.
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