Skip to main content
QMA LogoQMA Logo
  • Overview
    • Our Philosophy
    • Our History
    • The Team
    • Diversity, Equity & Inclusion
    • Contact Us
  • Overview
    • Diversification
    • ESG
    • Factor Foundations
    • Market Views
    • Solutions and Customization
    • Value
  • Overview
    • ESG Insights
    • ESG Policy
    • Stewardship and Governance
  • Overview
    • Quantitative Equity
    • Global Multi-Asset Solutions
    • QMA Wadhwani

    Featured Solutions

    Featured Solutions

  • Client Log In
  • Careers
Rice Fields Palm Trees
ESG

Top-Down Portfolio Implications of Climate ChangeTop-DownPortfolioImplicationsofClimateChange

By Yesim Tokat-Acikel — Mar 23, 2021

20 mins read

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
Read More

Share

Key Findings

  • Environmental changes throughout the remainder of the 21st century will undoubtedly influence economic trends. Both physical and transition climate change risks have potential consequences for long-term investors. However, precise estimates of these risks are not available.  
  • To assess the top-down, cross-asset impact of climate change for strategic asset allocation, we consider both optimistic and pessimistic scenarios.
    • The optimistic scenario assumes that signatory countries will adhere to the Paris Agreement and that those goals will be achieved. While physical risks are more muted in this scenario, some transition costs and risks would be incurred.
    • The pessimistic scenario assumes that no mitigating policy or societal changes take place—CO2 emissions will nearly double from their current levels by 2050 and continue to rise thereafter. While transition costs and risks are small in this scenario, physical risks and costs would be material. 
  • Our top-down analysis suggests that growth-oriented assets, such as equities, would be directly impacted by climate change. As such, they would decline in the pessimistic scenario. This impact is likely to vary significantly across countries, with the most sizable impact expected in certain emerging markets.  
  • Inflation and rates-oriented assets have less clear top-down implications. While central banks increasingly recognize that climate change can be a major source of systemic financial risk, the impact of such changes is uncertain, with forces pulling in different directions. We find that the impact on bonds, REITs and commodities is likely to be more localized at the micro level of individual securities, rather than at the asset-class level.  
  • Using these strategic return expectations, a top-down climate risk-aware portfolio would tilt away from regions and assets that are expected to be adversely affected for better risk-adjusted returns.  
  • In our globally integrated world of cross-border revenue and supply chain links, we believe that combining both bottom-up and top-down views of the economic impacts of climate change is critical, as this provides the best opportunity for desired portfolio outcomes. 
     
Read More
Read More
Research Brief

This publication is also summarized in a Research Brief.

Read More

Explore More

ESG Insights

Solutions and Customization

Diversification

Factor Foundations

  • By Yesim Tokat-AcikelDirector of Multi-Asset Research, QMA
  • About Us

    • Overview

    • Our Philosophy

    • Our History

    • The Team

    • Inclusion & Diversity

    • Contact Us

  • Insights

    • Overview

    • Diversification

    • ESG

    • Factor Foundations

    • Market Views

    • Solutions and Customization

    • Value

  • ESG

    • Overview

    • Insights

    • ESG Policy

    • Stewardship and Governance

  • Strategies

    • Overview

    • Quantitative Equity

    • Global Multi-Asset Solutions

    • QMA Wadhwani

    • Careers

QMA Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help

Prudential Financial, Inc. and its related entities.

For Professional Investors only. All investments involve risk, including the possible loss of capital.

It is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM, Inc., is the principal asset management business of PFI and is a registered investment advisor with the US Securities and Exchange Commission(SEC). Registration with the SEC does not imply a certain level of skill or training.  PGIM is a trading name of PGIM, Inc and its global subsidiaries. 

In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic Area (“EEA”), information is issued by PGIM Netherlands B.V. with registered office: Gustav Mahlerlaan 1212, 1081 LA  Amsterdam, The Netherlands. PGIM Netherlands B.V. is, authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands (Registration number 15003620) and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Limited and/or PGIM Netherlands B.V. to persons who are professional clients as defined  under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II).

In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ("PGIM Japan"), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of the Securities and Futures Ordinance (Cap.571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.

Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. PGIM, the PGIM logo and Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.
The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.

©2021 PFI and its related entities. © 2021 QMA. All Rights Reserved.

QMA’s predecessor began managing U.S. equity accounts for institutional clients in January 1975.