Australia’s largest investment consulting firm, JANA, is calling on investors to factor climate change into major investment decisions, warning that the impact of climate change and unclear policy responses by governments, including Australia’s, pose a significant risk to returns.
In a game-changing report to its clients, including Australia’s leading superannuation firms and insurers, JANA urges investors to ensure that climate-related financial risk is adequately considered and monitored, as climate change is likely to influence all parts of the global economy.
The report, ‘Climate change – implications for investment strategy’, demonstrates that current policies on climate change, if continued, will have a detrimental impact on many investments.
It incorporates the potential costs of physical changes resulting from climate change and the impact of policy changes.
The transition to a less carbon intensive global economy is inevitable, presenting medium and longer-term financial risks and opportunities for investors, according to JANA’s Head of Responsible Investment Research, Tim Conly.
“We expect climate change and climate-related transition and physical risks to impact on future investment returns.
The financial risks associated with climate change have immediate implications for investment governance and process, and will become more influential on investment strategy over time,” Mr Conly said.
“Investors should integrate climate change considerations into their governance frameworks, investment decisions and monitoring activities.
This includes looking to target investments that would benefit from the transition to a low carbon economy. However, for larger scale investment in particular, policy and regulatory uncertainty needs to be overcome,” he said.
What are some of the data findings this advice is based on?
JANA has approximately $600 billion in total assets under advice. A survey of JANA clients has also demonstrated widespread dissatisfaction with Canberra, with the vast majority of investors and institutions wanting stronger government action on climate change and policy certainty.
Nearly nine in 10 respondents to the survey stated the government should take more action to address climate change and had provided insufficient certainty to investors around climate change policy.
The survey also revealed more than 80 per cent of respondents believe climate change presents a real risk to investment concerns and their long-term portfolio outcomes.
The report includes scenario modelling prepared by JANA in conjunction with specialist researcher Climate Insight.
Dr Danyelle Guyatt from Climate Insight said the report’s modelling was based on two International Energy Agency scenarios assessing a range of potential impacts on risk asset returns over the medium and longer-term.
The first scenario, Stated Policy Scenario, anticipates limited global policy co-ordination and the continuation of currently announced policies, which would equate to 3 degree increase in global temperatures.
The second, the Sustainable Development Scenario, models a more aggressive – and critically at this stage, hypothetical – policy response and emissions technology developments, which limits long-term temperature rise to 1.8 degrees.
According to Dr Guyatt, “the physical and transition risks of climate change are expected to have a significant negative influence on investment returns over time, but the Stated Policies Scenario is worse from an investment perspective.
The cost of doing nothing is projected to be greater in the long term.
“This reinforces a need for portfolio diversification to build resilience across a range of climate-related scenarios,” she said.
Mr Conly said “in both scenarios we anticipate policy and technology developments will gradually shift the relative risk/return prospects in favour of ‘’green’’ (lower emissions) versus ‘’brown’’ (emissions intensive) assets”.
“The longer the delay in coordinated action to address climate change, the greater the likelihood of the impacts of climate change become more material,” Mr Conly said.