Environmental risks and investment portfolio value: An Investment Leaders Group research project
This project provides a scientifically sound explanation of how environmental trends such as climate change create investment risks and explores how different portfolios perform under a variety of future climate scenarios.
Investors are beginning to ask how global environmental trends such as increased pressure on land for food production, soil degradation, localised water stress and extremes of weather will affect the macroeconomic performance of countries, and how this will play out at the industry and firm level. In order to address such questions, both the trends themselves and their resulting economic impacts, including the value of asset portfolios need to be modelled in order to begin quantifying their aggregated effects.
Correlated trends and international trade dependencies mean that impacts arising in one market could go on to affect others, creating instabilities in the global financial system. In principle, the financial impacts resulting from some risk exposures can be hedged through strategic asset allocation and portfolio construction, while others are effectively ‘unhedgeable’ (systemic) and will require policy action to address environmental change and enable investors to meet their financial goals.
Studies in economics and finance address the effects of ‘aggregate shocks’ on economic performance, but not necessarily from the perspective of social and environmental risk or the value of assets. The issue has general relevance to investors across all asset classes. This research project will shed light on the vulnerability and resilience of different asset classes to long-run environmental risks using climate change as an illustrative mechanism, placing investors in a stronger position to build future portfolio strategies.