Climate change biggest issue for markets in coming years, say large asset owners

Large asset owners view climate change as the biggest issue for markets over the coming years and half are using climate data on a regular basis to manage risk, according to a new survey from MSCI. 

Nearly a third (31 percent) of institutions with more than $200 billion in assets cite climate as the top trend impacting investments over the next three to five years, notes the study of 200 executives from pension funds, sovereign wealth funds, insurers and endowments. 

That’s followed by disruptive technologies such as artificial intelligence and big data (19 percent) and the increasing sophistication of ESG measurement and management (14 percent). 

Smaller institutions, however, have a different view on the themes most likely to affect investments in the mid-term. Firms with less than $25 billion in assets say market volatility or uncertainty will have the biggest impact (26 percent), followed by increasing market regulations (23 percent) and the increasing complexity of investment options (15 percent). 

Despite the impact of Covid-19, climate has remained a key focus of institutional investors over the last year and is set to grow in importance due to incoming regulation in a range of jurisdictions. From the European Green Deal to Canada’s green taxonomy and China’s net-zero emissions pledge, regulators around the world are forcing asset owners to pay more attention to climate issues. 

MSCI’s survey also reports that climate data continues to grow in importance for asset owners, although larger institutions are well ahead of their smaller counterparts in its use. Looking at respondents with more than $200 billion in assets, 50 percent use climate data regularly to manage risk and 45 percent use it regularly to identify new investment opportunities. 

By contrast, institutions with less than $25 billion in assets are around four times less likely to use climate data routinely for either purpose. 

The application of climate data, from information on changing temperature patterns to corporate disclosures on carbon emissions, is still an emerging area, note some of the executives spoken to by MSCI for the report.

‘Classical risk management is quite established and quantitative,’ says one large Canadian pension fund quoted in the research. ‘For things like climate risks, it’s newer and much further out in time horizon, and there’s no settlement on standard metrics and definitions.’ 

The MSCI survey is the latest piece of research to highlight the growing importance of ESG issues to asset owners. A recent report by bfinance finds many institutions have increased their focus on ESG due to Covid-19.

‘The combination of climate-related events, such as devastating wildfires, floods and droughts, and a global pandemic have accelerated the paradigm shift on ESG and climate change,’ Baer Pettit, president and COO at MSCI, says in a statement. ‘Once an issue for ‘green funds’ and side-pockets, ESG and climate are now firmly established as high-priority issues.’