- Multi-Asset Strategist
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
As the momentum behind decarbonisation and net-zero objectives builds around the world, asset owners are increasingly engaged in addressing the investment implications of climate change. The focus thus far has largely been on implementation at the security- and manager-selection levels, but there is a growing recognition of the need to factor climate change into broader investment policy and asset allocation decisions. To help with this process, our Investment Strategy Team, in partnership with our Climate and ESG teams, recently completed a comprehensive effort to integrate climate risks into our capital market assumptions (CMAs).
Our CMA process follows a classic building-block approach in which the components of total return — income, growth and valuation — are forecast independently. At the heart of the approach is an assumption that macro variables (e.g., GDP, inflation) and fundamental variables (e.g., EPS growth, credit losses) each have a bearing on total return.
With this as our starting point, we needed a framework for thinking about the climate inputs that should be incorporated into the CMA process. We chose to focus on two areas of climate risk:
Given the complexities and variations in the categories of climate risk, we employed two distinct approaches to estimate their impact on macro variables. For transition risk and chronic physical risk, we followed a scenario-based approach that draws on policy scenarios designed by the Network for Greening the Financial System (NGFS), a group of central banks and supervisors. The output from three different integrated assessment models is available for each of the scenarios, providing some model-risk diversification in estimating potential paths for real GDP and inflation. Figure 1 shows 12 of these paths for US real GDP (left) and 12 for inflation (right). We can see that there is a wide dispersion of outcomes, but generally speaking, real GDP is expected to be lower than baseline and inflation is expected to be higher than baseline, driven by transition risk.
For acute physical risk, we leaned heavily on our partnership with Woodwell Climate Research Center to devise a forward-looking model that integrates physical-risk projections and the likely impact on GDP. We viewed the challenge as analogous to measuring corporate credit losses, in that there are both losses and recoveries to consider. The process we arrived at involved developing country-level assumptions for future extreme climate events (e.g., a 1-in-100-year precipitation event), the associated damages and recoveries, and the potential impact on real GDP.
In our new paper, Integrating climate change into capital market assumptions: our approach and findings, we offer a deeper dive on our climate-aware CMAs, including our fundamental asset-class methodology. We also compare the results with our regular CMAs and highlight several findings, including the greater impact on equity (versus fixed income) and on emerging market equity (versus developed). Ultimately, we think integrating climate-related inputs into a CMA methodology is likely to alter asset allocations. Even if the changes in CMAs are modest, they may impact rank-order preferences for asset classes and the relative attractiveness of risk assets themselves. One final point: climate change is dynamic and uncertain, and asset owners will need to periodically revisit their asset mixes as policy evolves and climate scenarios unfold.
Income investing in multi-asset portfolios: Tipping the balance in your favour
Income can play a crucial role in the pursuit of investment objectives over time, but research from our iStrat Team argues for a balanced approach to asset allocation decisions given the potential trade-offs between income and capital return, risk, and portfolio diversification.
Long/short investing in European equities' growing dispersion
We explore how growing dispersion in European equity markets is driving opportunities for long/short investors, fueled by structurally higher inflation, changing market leadership, and a renewed focus on valuation.
Monthly Market Snapshot — August 2023
A monthly update on equity, fixed income, currency, and commodity markets.
Fed not yet willing to declare victory on inflation
We think the Fed is done raising rates for this cycle, despite the likelihood that they are being overly optimistic about inflation. Read to find out why.
When extreme weather becomes the norm: what’s next for climate investors?
Climate investors can play a crucial role in accelerating mitigation and adaptation solutions. But finding investable opportunities requires a deep understanding of the climate investing landscape.
More from the core: How fundamental extension (140/40) strategies could help
Extension strategies may offer investors more flexibility in portfolio construction, along with potential to achieve greater risk-adjusted returns, thus delivering “more from core” in equity allocations without taking on significantly more tracking risk.
WellSaid: The economic significance of biodiversity
In this short clip from his WellSaid podcast interview, Dr. Zach Zobel of Woodwell Climate Research Center discusses the economic importance of coral reefs — lynchpins of marine biodiversity and vital to fishing, tourism, and other industries.
Three themes (and what they mean) for income investors
With several macro crosscurrents at play, Portfolio Manager Peter Wilke suggests that income-oriented investors not lose sight of the “big picture” in their quest for yield.
Pivoting from innovation and growth to stability and value
In a more volatile world, stability may take priority over innovation, and that, explains Multi-Asset Strategist Adam Berger, would tend to favor value stocks over growth stocks.
Thematic investing focus: The transportation revolution has arrived
New technology and environmental concerns are creating a disruptive force in the transportation sector, leading to supply-chain investments and a host of new addressable markets.