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Climate risk and resilience

The Investment Leaders Group (ILG) has developed a model that quantifies the impact of potential climate and energy regulation on company profitability. The model aims to improve stock picking and empowers investors to engage with companies on actions they can take to make them ‘future proof’.

In addition, the ILG has studied the economic and financial impacts of climate risk in order to identify opportunities for reducing climate-related investment risks through portfolio construction and diversification across different asset classes, regions and portfolios.


Climate scenario analysis

The ILG developed a model allowing investors to assess issuer- and industry-level margin impact of existing and expected energy and climate regulation in selected industries and countries, taking into account potential mitigation responses by issuers and industries. It can easily be integrated into the traditional financial modelling process and thus provide the basis for investors’ scenario analyses. Our aim is to help the investment industry price in potential future risks associated with energy and carbon regulation, and encourage mitigating strategies.

In addition, the ILG employed a unique approach to address the short-term implications of long-term climate issues in relation to portfolio risk. The complex analysis was the fruit of a collaborative effort between three research entities within the University of Cambridge, namely the Cambridge Centre for Risk Studies (CRS), the Cambridge Centre for Climate Change Mitigation Research (4CMR) and the Cambridge Judge Business School.

The study concluded that short-term shifts in market sentiment induced by awareness of future, yet unrealised, climate risks could lead to economic shocks, causing substantial losses in financial portfolio value within timescales that are relevant to all investors.

Our aim is to provide investors with guidelines for minimising their exposure while, at the same time, stimulating a dialogue that goes beyond mere reallocation of resources to build a more sustainable capital market in an economy that is subject to environmental change


Further details

The ILG published two research reports, Climate risk: an investors’ guide to measuring business risk from carbon and energy regulation and Unhedgeable risk: how climate change sentiment impacts investment highlighted above in 2015 and 2016.


Climate risk: An investors’ guide to measuring business risk from carbon and energy regulation

Feeling the heat wideThe COP 21 climate agreement indicates a growing global consensus for action on climate change. In response, the ILG’s work on carbon regulation risk assesses the impact of future carbon- and energy-related regulation on the most sensitive industries and geographies at a company level.

The ILG’s work on climate change sentiment risk takes a different approach and looks at the short-term risks stemming from how investors react to climate-related information, from policy decisions and technology uptake, to market confidence and weather events.

Visit the publication page to download the report.


Unhedgeable risk: How climate change sentiment impacts investment

Unhedgeable RiskNovember 2015 – This report analyses how shifts in market sentiment induced by awareness of future climate risks could impact global financial markets in the short term.

Visit the publication page to download the report.


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Investment Leaders Group members. Cambridge Institute for Sustainability Leadership.

 *HSBC Bank (UK) Pension Scheme


Lucy Auden

Lucy Auden, Senior Programme Manager, Investment Leaders Group