Helping Investors Understand Climate Risk

Helping Investors Understand Climate Risk

November 2021

By Corinne Neale, Kristina Church and Dr. Ron Dembo

When a large Canadian institutional investor approached BNY Mellon with the challenge of providing transparency to retail stakeholders around the investment impact of climate risk, the question came as no surprise. According to a Pew Research Center survey of 20,000 people in 17 countries published in September 2021,1 climate change is a personal concern so acute that citizens would be willing to change the way they live and work to mitigate it.

A climate-risk scenario analysis can help investors better align their investment decisions to their responsible investing preferences and risk appetite.

But answering that question in a simple, factual way presents much more of a challenge. There are more than 100 climate models in current use, even at the broadest level, per Columbia Climate School.2 Tracing how factors in those models then manifest as risks for specific holdings in a portfolio or fund becomes even more complex. And beyond that, investment advisors face the difficulty of translating those risks into sufficiently clear layperson’s terms to help retail investors understand how and where to invest in alignment with their values and investment goals.

 

The best approach for responding to this question requires a willingness to examine all potential scenarios, made possible by two elements:

  • robust ESG data
  • AI-enabled analysis of the enormous amounts of information on climate risks as they affect economic sectors, regions, and even individual companies.

In this case study, BNY Mellon and RiskThinking.AI apply that approach to a climate risk analysis for the BNY Mellon Global Infrastructure Dividend Focus Fund to answer three questions:

  • First, what is the impact of companies doing nothing to change their current practices?
  • Second, what are the areas in which a portfolio manager should engage?
  • Third, how can the portfolio manager best serve investors’ interests in this process?

Corinne Neale

Global Head of Business Applications for Data & Analytics Solutions

BNY Mellon

Kristina Church

Head of Responsible Strategy

BNY Mellon Investment Management

Dr. Ron Dembo

Founder and CEO of RiskThinking.AI(TM)


 

1 https://www.pewresearch.org/global/2021/09/14/in-response-toclimate-change-citizens-in-advanced-economies-are-willing-to-alterhow-they-live-and-work/

2 https://news.climate.columbia.edu/2018/05/18/climate-models-accuracy/

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Future First Insights


 

In the Future First Insights series, industry experts share their perspectives on the most urgent issues for investors who want to make a positive impact on people and the planet.

 

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