Pricing climate risk: A multidisciplinary approach

Climate change will affect prices across the capital market spectrum. As active managers and fiduciaries, we consider it our responsibility to work toward solutions that enable us to accurately price assets, and we believe a multidisciplinary research approach enhances our ability to get climate-related repricing right.

ANY VIEWS EXPRESSED ARE THOSE OF THE AUTHORS AS OF THE DATE OF PUBLICATION, ARE BASED ON AVAILABLE INFORMATION, AND ARE SUBJECT TO CHANGE WITHOUT NOTICE. INDIVIDUAL PORTFOLIO MANAGEMENT TEAMS MAY HOLD DIFFERENT VIEWS AND MAY MAKE DIFFERENT INVESTMENT DECISIONS FOR DIFFERENT CLIENTS. ANY FORWARD-LOOKING ESTIMATES OR STATEMENTS ARE SUBJECT TO CHANGE AND ACTUAL RESULTS MAY VARY. CERTAIN DATA PROVIDED IS THAT OF A THIRD PARTY. WHILE DATA IS BELIEVED TO BE RELIABLE, NO ASSURANCE IS BEING PROVIDED AS TO ITS ACCURACY OR COMPLETENESS.

Strategic collaboration with Woods Hole Research Center

In an effort to bring a deeper, fact-based understanding to the integration of climate science and asset management, a cross-asset group of our investors is working closely with WHRC, one of the world’s leading climate science research organizations, on a multiyear initiative. We are developing a series of maps integrating climate data, financial data, and geospatial data that enable us to visualize and quantify how and where climate change may affect capital markets. We expect these groundbreaking investor tools to enhance our ability to assess potential asset repricing and investment outcomes based on climate risk.

To learn more about this initiative, click here.

Like most secular trends, climate change presents significant opportunities and risks for investors, but so far, even asset owners with long-lived liabilities have largely failed to incorporate it into their portfolio management and capital allocation considerations. As active managers and fiduciaries, we consider it our responsibility to help protect and grow our clients’ assets. Working toward solutions that enable us to accurately price assets is a big part of that. We believe a multidisciplinary research approach enhances our ability to get climate-related asset repricing right.

Accelerating solutions through collaboration

At Wellington, several research teams, including our equity, fixed income, and ESG analysts, participate in the investment discussion around the physical risks of climate change. Whether studying heat, drought, wildfires, flooding, hurricanes, or water availability, we believe this mosaic gives us an edge in discerning which assets may face greater risk, and in more accurately quantifying those risks.

Our goals are to:

  • Understand the causes, responses, and management of acute and chronic physical risks
  • Identify entities that influence environmental management and regulation (municipalities, governments, industries, and NGOs)
  • Assess which companies are actively factoring climate science (and related ESG considerations) into their adaptation and mitigation strategies, and raise executives’ awareness around climate change preparation
  • Improve our ability to quantify liabilities and appropriately price securities exposed to climate-related risks
  • Invest according to where we see market inefficiencies with respect to climate risk…

To read more, please click the download link below.

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