Climate Risk May Hit Portfolios Hard Now, Cambridge Study Finds

  • Model equity portfolios declined 45% over five years
  • Most investors `discounting the short-term' impact of warming

Equity portfolios may lose as much as 45 percent of their value due to shifting investor sentiment about climate change, according to a report by Cambridge University’s Institute for Sustainability Leadership.

Investors are becoming more aware of the short-term impact that the warming planet may have upon financial markets, affecting the value of holdings in portfolios modeled over five years, according to the report released Thursday.

Equity portfolios lost almost half their value, and fixed income investments went down 23 percent in one of the scenarios studied by the researchers. The report didn’t identify specific stocks within the model portfolios. Almost half of the losses cannot be hedged through reallocating holdings. The research was commissioned by the Investment Leaders Group, which includes Old Mutual Plc, Natixis SA and Allianz Global Investors.

“We were finding that most investors look at the physical impact of climate change in the long term, but were discounting the short term,” Andrew Voysey, head of the Cambridge Institute for Sustainability Leadership, said in an interview. “This report shows that perception matters now.”

Carney’s Concerns

Real estate, basic materials and construction were the worst-performing industries in the study across developed countries, while energy, consumer services and agriculture were the most affected in the developing world.

Bank of England Governor Mark Carney voiced concerns in September about the risks climate change poses to financial stability, saying that investors need to wake up to the potential of huge losses. This report shows that sentiment may drive market shifts, with triggers such as government policy, extreme weather and technological advances.

“The exposure of U.K. investors, including insurance companies, to these shifts is potentially huge,” Carney said in a speech at a Lloyd’s of London dinner on Sept. 29, referencing research that suggests that current modeling in the industry may be under-pricing risk by 50 percent if today’s weather trends become normal.

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