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

Written by Adam Cadle

10/09/2021

Over £1trn held by around half of UK institutional investors is exposed to “significant” climate risks, new analysis from LCP has found.

The research look at the exposure of UK institutional investors to climate risks based on their allocation across asset classes and, therefore, their estimated exposure to the five types of climate risk it has identified (equity, credit, data availability, transparency and transition risks). Just 1 in 10 asset owners’ portfolios contained low levels of climate risk.

LCP said some of the largest risks come from investments in corporate bonds, multi asset and private markets. Four in five (82%) UK institutional investors today hold more in corporate bonds and gilts than they do in equities, averaging 54% of their investments. Two thirds of UK institutional investors hold more than a tenth of their assets in private markets or multi-asset mandates.

Dan Mikulskis, partner at LCP, commented: “These types of investments can present serious climate risks. With spread levels reaching their lowest point for more than a decade, there is a question mark over whether any climate transition risks are realistically priced within corporate bonds. Because of the rising allocation to this asset class and the under-the-radar nature of this risk we believe this is potentially the most significant class of climate risk faced by investors.
 
“At the same time, in private markets there simply isn’t the data to make any accurate judgements around carbon intensity or climate alignment, making climate risks difficult to quantify and address.”

Despite these risks, LCP’s analysis revealed that 90% of UK institutional investors could significantly reduce their climate risk exposure over the next decade through changes to their investment decisions. UK institutional investors hold around 75% of their assets in listed equities, investment grade corporate bonds and government bonds – all of which have realistic pathways to net-zero emissions and lower climate risks, LCP said.

The consultancy is urging asset managers to increase transparency across all investment products, particularly those in private markets and it stated that managers of private assets must take a clearer stance on net-zero and communicate how they view alignment in their portfolios in order to keep climate risk down.
 
LCP argued that in actively managed equity and credit strategies, better reporting of carbon intensity and alignment metrics would help investors compare mandates and take a more informed overall view on their portfolio.

Related Articles