A Guide to Climate Change Investment Risk Management for US public defined Benefit Plan Trustees

Responsible Invest

The purpose of this paper is to provide an overview of climate change investment risks and opportunities for US public pension trustees, and introduce both quantitative and governance frameworks that trustees can use to approach climate change as an investment risk (as opposed to a nebulous uncertainty) and inform related tangible actions.

Assessing Climate Change Risk for US Public Pensions

Although climate change is a significant environmental, social and economic risk that is expected to have its greatest impact on the physical environment in the long term, we must change our behaviors now to address it and avoid dangerous temperature increases.

The rapidly evolving political, regulatory and economic landscape elevates the importance of climate change as a potentially material investment risk. To help investors quantify this risk, Mercer recently led a collaborative research project with 16 institutional investors, the key findings of which were: 

  • Climate change — and related human actions to curb it — will give rise to investment winners and losers.
  • Sector impacts will be the most meaningful.
  • Regional equity return impacts will be material, but vary by climate change scenario.
  • A 2°C scenario need not harm overall returns out to 2050.

For this paper, we ran an illustrative US public pension portfolio through our proprietary, forward-looking climate change investment risk modeling framework (the “TRIP framework”) to produce a set of quantitative results. This illustrates what the financial impacts may be on a portfolio, and can inform related risk management decisions under potential future climate scenarios.




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