Research from consultancy LCP says that over £1 trillion held by UK institutional investors is exposed to significant climate risks.

LCP says the first comprehensive climate risk profiling of more than 300 UK institutional investors shows 50% face major climate threats to the value of their portfolios. The research entitled, “The tip of the iceberg” has analysed the exposure of UK institutional investors to climate risks based on their allocation across asset classes and their estimated exposure to the five types of climate risk (equity, credit, data availability, transparency and asset transition risks).

The reseach shows only 1 in 10 asset owners’ portfolios contain low levels of climate risk. According to the report, some of the largest risks come from investments in corporate bonds, multi-asset and private markets but 90% of UK institutional investors could significantly reduce their climate risk exposure over the next decade through changes to their investment decisions. UK institutional investors hold around 75% of their assets in listed equities, investment grade corporate bonds and government bonds all of which have realistic pathways to Net Zero emissions and lower climate risks. Furthermore, this overall percentage is likely to remain relatively stable over the next 10 years.

LCP is urging asset managers to increase transparency across all investment products, particularly those in private markets. Managers of private assets must take a clearer stance on Net Zero and communicating how they view alignment in their portfolios in order to keep climate risk down. In actively managed equity and credit strategies, better reporting of carbon intensity and alignment metrics would help investors compare mandates and take a more informed overall view on their portfolio.

Dan Mikulskis, Partner at LCP, commented: “These types of investments can present serious climate risks. With spread levels reaching their lowest point for more than a decade, there is a question mark over whether any climate transition risks are realistically priced within corporate bonds. Because of the rising allocation to this asset class and the under-the-radar nature of this risk we believe this is potentially the most significant class of climate risk faced by investors. The good news is that the bulk of investments are in asset classes where climate risk can be addressed with the information we have available today, for example by investing in companies that have forward looking plans that are consistent with the Paris Agreement. Such measures would radically decrease the climate risks associated with these portfolios.”