The cumulative returns from coal assets will fall 58.9% by 2030 and 100% by 2050 if a 2-degrees world is achieved, according to Mercer modelling.
Oil and gas followed coal assets when it came to the biggest losses in returns at 42.1% by 2030 and 95.1% by 2050.
Mercer’s latest climate change report found that for nearly all asset classes, regions, and timeframes, a 2-degrees Celsius scenario lead to enhanced projected returns versus a 3-degrees or 4-degree Celsius world, and therefore a better outcome for investors.
Renewables was the asset class that would benefit the most from a 2-degree Celsius scenario with a return of 105.9% by 2030 and 177.9% by 2050.
This was followed by sustainability themed infrastructure at 26.4% by 2030 and 39.4% by 2050.
Projected returns by asset class
The report said expected annual return impacts remained the most visible at an industry-sector level particularly for energy, utilities, consumer staples, and telecoms.
Climate scenario differences
“Asset class returns can also vary significantly by scenario, with infrastructure, property and equities being the most notable. Variations in results between asset classes and across regions, cumulative impacts, and the emphasis on sustainable opportunities provide multiple portfolio construction possibilities for investors,” it said.
“In a 2-degrees Celcius scenario by 2050, there are minor positives as well for materials, telecoms and consumer staples sectors. In 3-degrees Celcius and 4-degrees Celcius scenarios, all sectors, apart from renewables, have negative return impacts, to 2030, 2050 and 2100, with return impacts varying between 0.1% p.a. and 7.7% p.a.”
The report noted that real estate was expected to be flat to 2030 under a 2-degrees scenario, but a four-degree Celsius scenario, even in the near term, started to impact negatively.
“Testing an increased probability of a 2-degree Celsius scenario with increased market awareness can result in sector-level returns where renewables increase by more than 100% and coal decreases by nearly 50%,” the report said.
“Positive asset class impacts include infrastructure at almost 23% and sustainable equity at more than 5%.
“Testing an increased probability of a 2-degrees Celsius scenario or a 4-degrees Celsius scenario with greater market awareness, even for the modelled diversified portfolios, results in +3% to -3% return impacts in less than a year.”
Mercer’s global head of investment research, Deb Clarke, said: “Advocating for and creating the investment conditions that support a ‘well-below 2-degrees Celsius scenario’ outcome through investment decisions and engagement activities is most likely to provide the economic and investment environment necessary to pay pensions, endowment grants and insurance claims over the timeframes required by beneficiaries”.
Mercer’s modelling draws on third-party data that integrates the treatment of economics, energy systems, and the environment to capture linkages and feedbacks.