Climate change erodes investors’ expectations

Investors, including superannuation holders, will need to revise their expectations downwards as a direct result of the impact of climate change, according to Frontier Advisors.

The firm said that there were a number of major secular themes which could potentially add to or detract from the long-term forecast for returns and it was the first time that Frontier had made a revision based specifically on the effects of climate change.

“As a result of analysis we have completed across a number of themes in this year’s review, we have lowered the likely returns we believe investors can expect, across all asset classes, by 0.25% per annum,” Philip Naylor, principal consultant at Frontier Advisors, said.

“The primary driver of this downward revision has been the long-term impact on the global economy of climate change.”

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In its analysis the company focused on four themes of demographics, productivity and technology, inequality and climate change.

Following this, the firm’s downward revision was based on a best-case outcome that government’s around the world reduced carbon emissions and limit global warming

“There are costs of transitioning to a low carbon economy, but the long-term costs of global warming and extreme weather events are far greater. There are a number of possible future scenarios with the degree of impact dependent on a range of different policy path responses policymakers make in the future,” Naylor added.

Frontier said it completed modelling of a number of possible policy pathways and potential climate change impacts, including a more ambitious limiting of global warming to a two-degrees outcome, and pledges made under the “Paris Agreement” outcome.