Some of the UK’s largest investors such as pension funds have more than £1tn sitting in investments exposed to “significant” climate risks.
According to analysis of more than 300 UK institutional investors by investment consultants LCP, around 50% face major climate threats to the value of their portfolios.
LCP’s found that some of the biggest risks institutional investors face come from their exposure to corporate bonds, multi-asset and private markets. Some 82% of UK investors hold more money invested in corporate bonds and gilts than in equities, LCP said.
Meanwhile, two thirds of UK investors hold more than a tenth of their assets in private markets of multi-asset mandates.
Dan Mikulskis, a partner at LCP, said: “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.”
Mikulskis pointed to a lack of private markets data, which he said makes it difficult for institutional investors to assess climate risks in this asset class.
LCP said its analysis found that 90% of institutional investors could reduce their climate risk exposure over the next decade by making tweaks to portfolios, including investments in listed companies that have set realistic pathways to achieving net zero emissions.
LCP is also urging asset managers to increase transparency across all investment products regarding climate risks, particularly those focused on private markets.
Mary Spencer, a partner at LCP, said the 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.”
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