New analysis estimates that over £1tr held by around half of UK institutional investors is exposed to significant climate risks.

The analysis, which was conducted by consultancy LCP for its report The Tip of the Iceberg, analysed the exposure of UK institutional investors to climate risks based on their allocation across asset classes and, therefore, their estimated exposure to the five types of climate risk it has identified (equity, credit, data availability, transparency and asset transition risks). The analysis demonstrates the pervasive nature of climate risk with just 1 in 10 asset owners’ portfolios containing low levels of climate risk.

According to the report, some of the largest risks come from investments from corporate bonds, multi-asset and private markets. Four in five (82 per cent) UK institutional investors today hold more in corporate bonds and gilts than they do in equities, averaging 54 per cent of their investments. Meanwhile, two thirds of UK institutional investors hold more than a tenth of their assets in private markets or multi-asset mandates.

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.”

Despite these risks, LCP’s analysis reveals that 90 per cent 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 per cent 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 decade.

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