On the go: More than £1tn in assets held by UK institutional investors is exposed to significant climate risks, according to research from LCP.
The consultancy’s analysis, based on 321 institutional asset owners with total assets of more than £280bn that represent 10 per cent of private sector pension assets in the UK, showed that 50 per cent of the total universe face major climate threats to the value of their portfolios.
The report, which analysed exposure to five types of climate risk – equity, credit, data availability, transparency and asset transition – revealed that only one in 10 asset owners have a low-risk portfolio.
Some of the largest risks come from investments from corporate bonds, multi-asset and private markets, LCP stated.
Eighty-two per cent of institutional investors today hold more in corporate bonds and gilts than they do in equities, averaging 54 per cent of their investments, while two-thirds of asset owners hold more than a 10th of their assets in private markets or multi-asset mandates.
Dan Mikulskis, partner at LCP, noted that these types of investments “can present serious climate risks”.
He said: “With spread levels reaching their lowest point for more than a decade, there is a question mark over whether any climate transition risks are realistically priced within corporate bonds.
“Because of the rising allocation to this asset class and the under-the-radar nature of this risk, we believe this is potentially the most significant class of climate risk faced by investors.”
When it comes to private markets, “there simply isn’t the data to make any accurate judgments around carbon intensity or climate alignment, making climate risks difficult to quantify and address”, he added.
Despite the stark scenario, the analysis showed that 90 per cent of institutional investors could significantly reduce their climate risk exposure over the next decade through changes to their investment decisions.
This is due to the fact that asset owners hold around 75 per cent of their assets in listed equities, investment-grade corporate bonds and government bonds – all of which have realistic pathways to net-zero emissions and lower climate risks, LCP stated.
Mikulskis said: “The good news is that the bulk of investments are in asset classes where climate risk can be addressed with the information we have available today; for example, by investing in companies that have forward-looking plans that are consistent with the Paris Agreement.
“Such measures would radically decrease the climate risks associated with these portfolios.”
