A scenario analysis tool that allows investors to model the impact of climate change on asset allocation is soon to be available from Mercer.

The tool has been developed with economic and scientific research compiled by Mercer, economic consultants NERA and insurance consultancy Guy Carpenter, supported by the International Finance Corporation, World Bank Group and the Department of Investment and Foreign Development, UK. It also looks at leading climate change models such as the WITCH model used by the Intergovernmental Panel on Climate Change.

The tool is being honed from research carried out with 18 institutional partners worldwide representing more than $1.5 trillion – it will be ready for others to use in May.

The measure of climate change impact by the tool on asset allocation is based on four factors: technological change and investment flowing into technology supporting a low carbon economy; resource availability or the impact on investments of changes due to chronic weather patterns such as on agriculture; physical impacts; and government policy to reduce carbon.

Helga Birgden, partner and global leader, responsible investment, Mercer, said:  “We have done a huge amount of analysis of the latest literature for our four scenarios. From there we are taking the scenarios and building in risk factors which represent what we consider to be the highest impact risks.”

Most of the 16 funds that have taken part in the project are having one of their portfolios modelled for stress testing the impact of climate change at a regional, asset class and some sector levels. The model will be updated annually.

“The idea is to equip investors with the basis for making decisions and to take action on what they might do in relation to these sorts of risks and opportunities,” said Birgden.

Helga Birgden is speaking this week at the Mercer Investment Conference in Melbourne, where she will interview Greg Fernance, head of capital markets and investment at Sydney University on how the University’s endowment fund will reduce the carbon intensity in listed equity investments by 20 per cent over three years.


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