Over £1trn held by UK institutional investors exposed to climate risk

More than £1trn held by UK institutional investors is exposed to significant climate risk, according to a report from LCP.

The firm, which conducted a climate risk profiling of more than 300 UK institutional investors, found that around 50 per cent had significant climate risk in their portfolios.

LCP developed a five-tier scale to gauge an institutional investor’s exposure to climate-related risk in their portfolio, with tier one indicating the highest level of climate risk or a lack of available data, and tier five indicating climate investment opportunity.

Using a weighted average of these tiers applied across an institutional investor’s strategic allocation to find a score out of 5, the average defined benefit (DB) pension fund in LCP’s data set scored 3 out of 5.

Around half of the DB schemes scored below three and only 10 per cent had a score above 3.5.

However, it stated that around 90 per cent of UK institutional investors had the capability to significantly reduce their climate risk exposure over the next decade.

LCP argued that by allocating equity and investment grade corporate bonds to low-carbon or Paris-aligned investment products that exist today, the score for the average pension fund could be improved from 3 to 3.6.

The report explained that this was because listed equities, investment grade corporate bonds and government bonds had “realistic pathways to net-zero emissions and lower climate risks”.

LCP partner, Dan Mikulskis, commented: “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.”

LCP partner, Mary Spencer, added: “Our analysis should act as a code red warning to UK Institutional investors. It’s pretty clear that the current trend away from listed equities and towards corporate bonds and private markets could expose investors to climate risk.

“The good news is that where there is a will there is a way and the majority of portfolios can be significantly improved with existing products and investments. What the industry does need is increased transparency and data over all asset classes so asset managers can make informed decisions.”

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