As climate change continues to climb the investment risk agenda of decision makers worldwide, Mercer has taken the proactive step to enter a global collaboration with Dutch based Ortec Finance, a leading provider of risk and return management technology and solutions.
Ortec Finance develops a broad range of scenarios and long-range projections on how the climate crisis could impact investments, from a rapid transition that limits warming to 1.5°C to a failed transition with warming above 4°C. The collaboration enables Mercer to provide its institutional investors with rigorous analysis to compare the risks and opportunities of their current allocations with potential allocations to other sectors and asset classes, such as private equity where much of the technological development for climate transition is being developed.
The scenario analysis, covering both assets and liabilities, is in line with Task Force on Climate-related Financial Disclosures (TCFD) reporting, which is required for UK pension schemes falling under the UK’s Climate Change Governance and Reporting Regulations.
Commenting on the collaboration, Steven Sowden, Principal at Mercer and Investment Consultant (Actuary) said: “Our clients want to be better informed about the relationship between their portfolio and the climate crisis. They want and need actionable insights.
“Combining Ortec Finance’s advanced climate change scenarios data and experience with Mercer’s industry leading investment expertise provides clients with a deeper level of granularity, allowing them to consider whether climate impacts are fully priced into every asset class and economic sector before making reallocation decisions.”
Ortec Finance’s scenario analysis provides long-range projections for asset owners, such as pension funds – from de-risking defined benefit schemes to growth-focused defined contributions, insurers, endowments and foundations – providing investors with a basis seeking to make their portfolios robust ahead of future challenges. Climate impacts are integrated into Mercer’s capital market assumptions – including its risk and asset allocation advice, funding calculations and discretionary fund management – and defined benefit scheme trustee appointments will receive high-level scenario analysis with their actuarial advice. The analysis helps asset owners explore opportunities that may arise from the climate transition, such as investment in new sustainable technologies.
Lisa Eichler, Co-Head Climate and ESG Solutions, Ortec Finance, commented: “Climate policy and technology changes lead to complex interactions and network effects, climate change itself poses an underappreciated risk to investors via chronic changes and violent extreme weather. From the outset, we worked with our modelling partners Cambridge Econometrics to design a modelling suite that provides answers to the most important questions for investors around climate risk.”
Willemijn Verdegaal, Co-Head Climate and ESG Solutions, Ortec Finance, added: “An unrivalled amount of academic rigor goes into the scenarios, including input from Cambridge Econometrics and being able to combine that with Mercer’s scale and the depth of expertise of their people is formidable recognition of the credibility of what we deliver to clients around the world.”