Why instos must better prepare for a climate crisis

Australia's huge bushfires underline how climate change can exacerbate environmental problems. Yet many asset owners haven't grappled with this impact on their portfolios.
Why instos must better prepare for a climate crisis

Is the world experiencing climate change or suffering a climate crisis? Recent evidence suggests the latter may be more accurate. 

Across late December into this month, breathtaking video and images have emerged of the massive bushfires consuming much of Australia's coastal areas. The fires, which in many cases have now lasted for over three months, have forced entire towns to flee and caused tens of millions of animal deaths. 

The conflagrations could end up doing more than A$4.4 billion ($3.02 billion) in damage to the economy, according to Katrina Ell, an economist at Moody's Analytics.

Earlier, in October, Japan was deluged by the unseasonably strong typhoon Hagibis, which swamped large areas of low-lying Honshu island and caused an estimated $10 billion in economic damage. And in California, forest fires raged late last year, ravaging 260,000 acres and costing $80 billion, according to Accuweather. In 2018 it was 1.8 million acres. 

These disasters, arriving on top of one another, are bad news – particularly if you are an insurance company. The likelihood more will happen every year is also sobering for the many asset owners staking more of their investment returns on real estate or infrastructure assets. 

As the world continues to warm, investors are going to have to begin considering the impact of climate risk on their investment portfolios. To date the response of most has been limited. The most concerned asset owners have signed the United Nations Principles of Responsible Investment (PRI), and committed to taking environmental, social and governance (ESG) principles seriously when investing. 

These are positive steps. Encouraging companies to take their environmental impact seriously, as is asking them to treat workers better, and be clear and precise about how they operate. 

But pursuing more ESG alone won’t prevent global temperatures from rising. 


According to current carbon emission projections, the world is going to miss the 2 degree Celsius temperature increase set by the 2015 Paris Climate Agreement, by a lot. As things stand, a rise of 3.5 to 4 degrees is likely. 

The difference makes for far worse conditions. Bigger storms, worse water shortages, more famine. 

That is bad news for entire economies – with consequences for the portfolios of the world’s institutional investors. 

“Climate risk is something serious and not something you can brush off,” Kim Chong, head of risk management and compliance for the Exchange Fund Investment Office at the Hong Kong Monetary Authority, told AsianInvestor. “In Asia you see a lot of climate instances, such as flooding and typhoons. And from the available evidence and talking to experts and the science have proven that climate risk is real and it transpires in the form of physical risk and transitional risk.”

New Zealand Super (NZ Super) agrees. “We believe it is paramount that responsible investors seek to measure and understand the risks from climate change and prepare their portfolio accordingly,” a spokeswoman told AsianInvestor

Investors across the globe would be well advised to consider how to react. Because as recent conditions reveal, climate change is not a hypothesis.


The most sophisticated institutional investors and regulators are already introducing the first step to meet this complex problem: conducting a far more concerted drive to reduce carbon emissions to the point that only a two degrees rise takes place. 

That process includes active advocacy of ESG, with asset owners placing pressure on investee companies to drastically reduce emissions.

But even were such efforts to lead to the most optimistic scenario under the 2015 Paris Climate Agreement – a 1.5 degree rise – weather events will worsen. Higher rises will have greater attendant physical consequences. 

Climate is a risk and if you don’t look at it properly it might diminish your investment value

Many industry participants are sceptical that sufficient political or investor pressure exists to cut emissions in time to avoid higher rises. 

Martin Wolf, an economist and Financial Times columnist, told the audience of the FT Investment Summit on September 24, “from your point of view, it [combating climate change] might affect your mandates, it might affect what you’d like to invest in ... but fundamentally we’re going to go over the climate change cliff”,

If a rise in climate risk is inevitable it becomes all the more important to quantify its likely impact. And yet it appears that few asset owners in Asia have put much time into doing so. 

Chong told AsianInvestor HKMA was looking at risk, adding “ESG is a journey and we will continue to strengthen our ESG framework in managing the Exchange Fund. 

“We are still learning and getting ideas from others in terms of lowering risks and protecting returns. Climate is a risk and if you don’t look at it properly it might diminish your investment value.” 

Similarly, the chief investment officers of several large, multi-country life insurers admitted to AsianInvestor on background that they hadn’t really done much exploration about the consequences of climate risk on their investment portfolios. 

“There is definite awareness and fantastic leadership going on [among asset owners and asset managers] but there is a very long tail,” admitted Fiona Reynolds, chief executive of UN PRI to AsianInvestor. “It’s concerning that you have investors looking after other's money who are not considering climate risk and opportunities for the future.”

This article was adapted from a feature that focuses on the impact of climate change on institutional investor portfolios, which originally featured in AsianInvestor's Winter 2019 edition.

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