Investors must start taking the threat of climate change seriously, according to a new report from consulting giant Mercer, which predicts that average annual returns from the coal sector could decline by up to 138 per cent over the next 10 years.

The report, Investing in a time of climate change, outlines actions for investors to manage the risks and opportunities of climate change.

The aim is to allow investors “to be better informed to identify, assess, and act on climate change within the investment process”.

“Although the timing and magnitude of potential climate impacts are uncertain, enough is now known to enable investment fiduciaries to incorporate better climate governance in their investment processes,” Mercer global head of investment research Deb Clarke said.

At the low end of climate change – where the world acts to stay within a 2°C rise in global temperature – there could be benefits for a range of asset classes, including emerging market equities, infrastructure, real estate, timber and agriculture. However at a more extreme 4°C scenario, emerging market equities, real estate, timber and agriculture would all be effected.

Renewables, nuclear and IT were the industry sectors set to benefit from climate impacts, while coal, oil and utilities were the most impacted.

Depending on the severity of climate change and the actions taken by governments to limit it, annual returns from the coal industry could fall by between 18 per cent and 74 per cent over the next 35 years, and between 26 per cent and 138 per cent over the next 10 years, the report predicts.

The renewables sub-sector, however, was expected to see average annual returns increase by between six per cent and 54 per cent over a 35 year time horizon (or between 4-97 per cent over a 10-year period), depending on the climate scenario.

“Our report identifies the ‘what?’ the ‘so what?’, and the ‘now what?’ in terms of the impact of climate change on investment returns,” chair of Mercer’s responsible investment team Jane Ambachtsheer said. “These insights enable investors to build resilience into their portfolios under an uncertain future.

“This report can act as a guide to creating an action plan. Whether it is setting portfolio decarbonisation targets, investing in solutions that address risks and opportunities, or increasing engagement with managers and companies, our report shows investors how they might take action. Engaging with policy makers is also crucial and helps empower investors in their role as ‘future makers’.”

Mercer collaborated with 16 investment partners, collectively responsible for more than US$1.5 trillion, to produce the report. It was supported by IFC, the private sector arm of the World Bank Group, in partnership with Federal Ministry for Economic Cooperation and Development, Germany, and the UK Department for International Development.

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