Sustainable investments and climate risks: many questions still open

Many questions are still open when it comes to sustainable investments and climate risks. So says Netspar scientific director Mathijs van Dijk at the kick-off of the research meeting “Sustainable investments and climate risks”. Two researchers have entered this rich research area and presented their research last Tuesday.

The research meeting addressed how long-term investors can deal with climate risks in their investment portfolios and how pension funds and insurers can elicit sustainability preferences from their participants.

Uncertain impact

How do investors deal with this issue? “Physical risk is seen as the main risk for long-term investors over the next 30 years,” says Erasmus University researcher Mathijs Cosemans. His thoughts then include the impact of rising sea levels (chronic risks) and extreme weather events, such as hurricanes and forest fires (acute risks) on investments.

Using various models, he shows that investors may have different beliefs about their long-term impact. After all, this impact is uncertain and cannot be extracted from historical data. These beliefs can lead to significant differences in strategic investment policies, such as allocation to equities.

Heterogeneous picture

Maastricht University researcher Peiran Jiao bridges the gap with Cosemans in his talk. “Beliefs are important,” he agrees, including in the domain of measuring sustainability preferences. Indeed, these preferences may be driven by underlying beliefs about the return or risk profile of sustainable investments.

However, how do you put your finger on these preferences and beliefs? He says it is not easy to make them concrete with a simple questionnaire. “People often have no idea what they prefer or do not prefer,” Jiao said.

With the help of incentives, he tried to bring hard-to-verify beliefs of his respondents to the surface. The result is a heterogeneous picture, with younger respondents in particular expecting sustainable investments to yield higher returns. According to Jiao, it is wise to have a good idea of these beliefs before measuring sustainability preferences.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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