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Three scenes for how climate change will impact portfolios

Investors are told to invest for the long term but what impact will climate change wreak on portfolios?

Monday, June 12th 2023, 11:03AM 3 Comments

by Andrea Malcolm

To help fund managers grapple with this issue as they prepare their first climate-related disclosure reports, the Financial Services Council (FSC) and Boutique Investment Group (BIG) have put out a report examining different future climate-related scenarios and how they might impact investment portfolios including returns, value, credit spread and rating and liquidity.

Fund managers with more than $1 billion in retail are now three months into the first annual reporting period on climate risks and opportunities under the Financial Services (Climate Related Disclosures and Other Matters) Amendment Act 2021.

The newly released Climate Scenario Narratives for the Financial Services Sector, commissioned from KPMG by the FSC and BIG, provides a common set of scenarios across short, medium and long term time horizons, which fund managers can use to assess how climate risks and opportunities might impact their strategies over time.

BIG chair Simon Haines hopes the report will support consistent and comparable reporting.

“We’re the first country in the world to be doing this on a fund-by-fund basis. Everyone is on a learning curve and this has allowed us to flock together,” he says.

The three narratives range from a best-case ‘orderly’ scenario in which global warming is limited to a 1.5 ℃ rise to a worst-case ‘hothouse’ scenario in which the planet heats 3 ℃ or more. Somewhere between the two is a ‘too little too late’ 2.5 ℃ increase narrative which Haines describes as probably the most realistic.

The best, 1.5 ℃ containment scenario will involve large amounts of regulation, he says, which will threaten some businesses from a legal standpoint. At the other end there will be a lot less regulation and legal impact but greater risk to businesses vulnerable to climate change such as agriculture and horticulture.

“Somewhere in that spectrum is a ‘too little, too late’ scenario which is probably the most realistic for New Zealand. New Zealand might have a lot of regulation but the rest of the world won't and so we get some regulatory impact here and also a lot of climate change impact.”

A second resource which is restricted to BIG/FSC members and is again aimed at providing a common reference point, is a Risk Database; a high level grid looking at risk by asset, sector and geopolitical region.

“This includes comment around the physical risk of climate change in different scenarios and the associated regulatory risk,” says Haines. “Then fund managers can add their own overlay.”

The third piece is a tools analysis report. “In order to use the grid and report on what’s in which portfolio we have to go out into the world and collect data. This looks at different data providers and their capabilities to meet aspects of the grid. That is much more of a value-added opinion piece.”

The critical role of financial advisers

Haines says financial advisers will need to be able to differentiate between fund managers' climate-related reporting in future.

Referring to Otago University’s award winning research which found fund managers in climate initiatives such as NetZero Asset Managers or the Investor Group on Climate Change have higher carbon intensity in their portfolios than those which aren’t, Haines says, “If that’s the reality we need financial advisers who can look at the mandatory reports coming out with a critical eye and differentiate between them.

“Fund managers without question have segments of their customer base wanting to know what fund managers are doing about climate and they look to financial advisers to be able to differentiate between those who are saying the right thing and those who are actually doing the right thing.”

Haines says this is an increasing area where financial advisers can add value.

“As I say, some financial managers talk a good game without doing a lot and equally you have some fund managers who actually have quite well integrated processes but are coy to talk about it because they are quite risk averse.”

Tags: Climate Change

« ‘Greenhushing’ another form of greenwashing says Aussie watchdogEvaluating the effectiveness of climate reporting »

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Comments from our readers

On 12 June 2023 at 12:19 pm John Milner said:
I don't think even Lewis Carroll could have written this saga. Just think of the time, resources and money that have and will go into this. And in reality, to achieve what?

My clients are more concerned with knowing their funds will outlast them. Not whether the fund manager is using compostable paper cups at morning tea, as was proudly stated by one of the banks at an ESG presentation.

I was exposed to some of that Otago University award winning research at the recent CFA conference. This was subsequently destroyed by Dr Jacqueline Rowarth of Lincoln University with hard, cold reality. This lady deserves a damehood.

I'm looking forward to finishing this terrible novel and getting back to some non-fiction.
On 12 June 2023 at 3:17 pm w k said:
@john milner: well said.

my clients are more interested in the net ROI, and in some cases, volatility of the funds. nothing else matters, not even the fees.
On 14 June 2023 at 5:24 pm Amused said:
BIG chair Simon Haines hopes the report will support consistent and comparable reporting.

“We’re the first country in the world to be doing this on a fund-by-fund basis. Everyone is on a learning curve and this has allowed us to flock together,” he says.

Yeah says it all really about the current state of the country. Ideology out of control.

Agree with John and w k's comments 100 percent.

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