Introduction to Climate Risk Assessment for Investment Portfolios: A Q&A with Daniel E. Ingram

Himanshu Gupta • June 15th, 2020.

Last year we sent Daniel E. Ingram, the Vice President of Responsible Investment Research & Consulting at Wilshire Associates, a series of questions by email to find out how institutional investors are integrating climate risks into their investment decisions. Daniel worked as Chief of Staff to Lord Stern on his landmark Review of the Economics of Climate Change and has advised asset owners around the world on cost-effective ways to reduce their portfolio exposure to carbon risks, so we felt he was well placed to answer our questions.

How can asset owners, such as endowments, foundations and retirement plans identify the risks from climate change?

“In 2016, Wilshire published a paper on “Climate Change: Evolving Risks and Opportunities for Asset Owners”. We outlined a series of steps asset owners can take toward identifying and managing portfolio risks from climate change, which we call the ClimateLens program.

In addition to educating trustees and investment staff on the physical and regulatory risks from climate change, one of the steps in program involves conducting deeper due diligence on investment managers to understand how they quantify potential future costs from climate change in their security analysis and asset valuations. This is particularly important for assets which are likely to be more exposed to future physical risks from extreme weather events such as flood-prone real estate investments and carbon intensive companies whose earnings are sensitive to higher carbon prices.”

Are asset owners getting the climate risk reporting they need from managers?

“Unfortunately the quality of disclosures by asset managers is often not commensurate with the potential magnitude of risk from climate change.

In 2017, the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) found that climate-related risk reporting particularly by asset managers is in the very early stages. The TCFD made a number of landmark recommendations to encourage better risk disclosures and innovation by the investment management industry.”

What tools can investors use to better understand the risks from climate change?

“Forward-looking scenarios may help investors get a better understanding of the magnitude and location of future climate risks. For example, what do scenarios tell us about how the supply chain of food and staples retailers might be disrupted if droughts become more frequent and more intense over time? Investors may also consider using heat maps to identify any concentrations of risk from climate change on a portfolio of global assets.”

Tyler Johnson is a first-year student intending to study Mathematical and Computational Science at Stanford University. Himanshu Gupta is the former advisory fellow to Vice President Al Gore and a dual degree student in MBA/MS in Climate Science at Stanford University.

Originally published at sej.stanford.edu.