Building climate resilience within a strategic asset allocation framework

Driving volatility and dispersion, climate change could have lasting effects on the risk and return profile of a strategic asset allocation plan.

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For professional investors only.

Key points:

  • Our climate research shows that certain asset classes and regions face material and growing climate risks in the next 10 to 30 years.
  • Allocators should anticipate a wider range of outcomes in climate-sensitive asset classes and, potentially, plan-level returns.
  • Allocators can build climate resilience into their investment policy today to capture potential return opportunities associated with climate change.

While some of the risks of climate change may seem far off, the social, economic, geopolitical, and environmental disruptions of climate change are already apparent, and we believe allocators should incorporate these considerations into strategic asset allocation (SAA) plans today. Record-setting heat, flooding, wildfires, and hurricanes have repeatedly caused massive, costly destruction and are leading to business disruptions, higher capital spending needs, higher insurance costs, and greater potential for impaired and/or stranded assets. These trends are widely expected to continue. According to our climate-science partners at Woodwell Climate Research Center, the risks of climate change will become more severe and widespread over the next 10 to 30 years, with material implications for investment performance.

We believe climate change could have lasting effects on a plan's risk and return profile by creating increased volatility and dispersion within and across asset classes, sectors, and geographies — the traditional building blocks of an SAA. We take the view that allocators need to factor climate change into their structural planning, and in this paper, we propose a climate-aware SAA framework to help them do so.


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