Climate change could put trillions of investment dollars at risk over the next 20 years, a global study released on Wednesday said, calling for pension funds and other investors to overhaul how they allocate funds.
Risks from more extreme weather, continued delay in climate policy by governments and uncertainty over the shape of a new global climate pact were major concerns, while renewable energy, agriculture and infrastructure could be opportunities.
The study, led by global investment consultancy Mercer, describes climate change as systemic risk because it challenges the conventional allocation of assets and requires new ways of assessing climate policy and change risks.
For example, global warming-related policy changes could boost the cost of carbon emissions for power generators, aluminum smelters, transport and other sectors by USD8 trillion by 2030, said the report.
The Investor Group on Climate Change in Australia, which represents about $600 billion in assets under management, said stronger climate change policies were needed to drive emissions-cutting investments and reduce longer-term risks.
"Weather events like the recent floods in Australia will continue to impact infrastructure, food security and property, contributing to material portfolio risk for institutional investors," Chief Executive Nathan Fabian told Reuters.
The study was compiled with the help of the International Finance Corporation, part of the World Bank, and 14 institutional investors, mostly pension funds.
The report, designed as an investment guide, looked at four climate policy scenarios.
These ranged from regional divergence where some regions, such as the European Union and China/East Asia take strong action to reduce greenhouse gas emissions, to the least-likely scenario of a breakdown in efforts to fight climate change.
It also looked at the estimated flow of investment into low-carbon technologies such as wind, solar and nuclear, the impacts of climate change such as more extreme storms, floods and rising sea levels and costs from global carbon policy decisions.
It found that the cost of impacts on the environment, health and food security could exceed $4 trillion by 2030, with longer policy delays bringing rising costs, mostly from adaptation spending such as building sea walls.
It also found that investment needs could top $5 trillion by 2030 for low-carbon technologies such as energy efficiency, biofuels, nuclear power and carbon capture and storage.
The authors found a split between regions on emissions policies the most likely of the scenarios, with a cost on carbon pollution at USD110 per tonne in the countries studied.
The "delayed action" scenario sees carbon costing just USD15 a tonne to 2020, but jumping to USD220 a tonne globally as 2030 nears.
Taking stern action sooner on climate policy was the least disruptive and best for investors, said the report.
"The uncertainties are lower than for the other scenarios, as investors are able to predict the pathways of policies with a reasonable degree of confidence," says the report of the "stern action" scenario.
Private equity investment opportunities in renewable energy, forestry and agriculture, infrastructure and real estate were also dependent on regional policies, it said.