Catering key climate change mitigation into our asset allocation process
The third year of the Covid crisis began with renewed concerns over the interplay between surging inflation and an economic recovery contingent on concerns over policy tightening, a trend further accelerated by the Russian-Ukrainian conflict. While we collectively gather ourselves to implement preventive measures to build sturdier economies and markets against further tail events, ominous signs loom on the horizon in the form of climate risk. Weather-related events have historically demonstrated financial and physical ramifications against which ex-post remedial measures have proven to be ineffective.
Quantifying and qualifying ex-ante climate risk is and will continue to be a daunting task. Much like Covid, the impact of climate change is undoubtedly global but at a scale severalfold greater due to its dual dimension of granularity and time horizon. Any one of the extreme weather-related events, from storms to droughts and temperature swings between seasons in any part of the world, will not only have an immediate impact on the affected region, but will reverberate across regions in a cascading fashion for years if not decades.
In the previous edition of our annual Medium- and Long-Term Forecast, we initiated a discussion of the importance of incorporating climate risk into our future analysis. Back then, we were convinced that the transition to a low carbon economy would be a key driving force of growth potential and global activity altering financial market dynamics, which would in turn alter cross-asset expected returns on a medium- to long-term horizon.
In the 2022 edition, our outlook for the multi-asset universe explicitly accounts for both the near-term post-Covid landscape and the possible long-term repercussions of climate change. As a starting point, we rely on the reference scenarios established by a consortium of climate scientists, economists and central banks (Network of Central Banks and Supervisors for Greening the Financial System or NGFS), representing a milestone effort offering a flexible framework exploring risks present in a number of distinct possible futures.
Integrating these scenarios with our current methodology allows us to offer a coherent picture of how each possible climate scenario and mitigating factors result in different “what-if” consequences for Amundi’s multi-asset universe. As such, the results portrayed here span several dimensions in terms of severity, likelihood and time horizon of the structural change in monetary and fiscal policy affecting the financial system.
The findings enable us to understand and get a clearer view of the scale of the challenges that will unfold, identifying factors that allow us to pave a path forward. Further developments are in the pipeline as data and methodologies become standardised, regulations are set and additional institutions foray into the climate change arena. Amundi is taking a protective stance in order to lead a discussion of best-practice pathways to improve portfolio outcome opportunities and risk-management practices.