As climate change worsens extreme weather events like the
record-breaking heat in the Pacific Northwest last month, another concern looms
— that the impact on companies from global warming could incinerate people's
retirement savings.
Pensions and 401(k) plans are "vulnerable," along
with the rest of the global economy, to climate risks, the Government
Accountability Office told Congress in a recent report that looked at the
potential threat to federal employees. And costs from disasters such as
drought, wildfires, flooding — as well as the long-term expense of shifting
from fossil fuel to renewable energy — can boost corporate and broader economic
losses, the agency warned.
People are starting to "really make the link to saying,
'As I think about this, is my retirement portfolio at risk?'" Emily Kreps,
global director of capital markets for CDP, a nonprofit group that tracks
climate information for investors, told CBS MoneyWatch.
Roughly two-thirds of major global companies owned
buildings, plants or other assets "at high risk of physical climate change
impacts," according to a 2020 analysis from Trucost, an affiliate of
S&P Global Market Intelligence. The greatest risks come from wildfires,
water shortages, heatwaves and hurricanes, according to the research firm.
Some sectors, like fossil fuel companies, are at
"heightened risk," according to GAO. Annual investment returns from
the coal, oil and gas industry could each drop about 9% every year through 2050
under one scenario, the agency notes, citing a 2019 report led by advisory firm
Mercer. And that assumes global temperatures don't rise by more than 2 degrees
Celsius, as some scientists fear it might.
Utility companies' annual investment returns may decline 3%,
according to the report, while renewable energy, like solar, could see a rise
of up to 3%. Big players that sell consumer staples, such as food, beverages
and household products are also vulnerable to extreme weather given rising
concerns about access to water and risks to crops.
Mother of all risks
Investors increasingly focusing on climate change not only
because of the heightened risks, but also because of the opportunity to market
new products. Large private money managers like BlackRock are adding
"Environmental, Social and Governance" (ESG) funds to their portfolio
lineups to meet surging investor demand. ESG mutual fund and ETF investments
rose to $51 billion in 2020, up almost tenfold since 2018, according to
Morningstar.
Concern over climate change is now growing in a way that
wasn't as common even five years ago, Jon Hale, director of ESG strategy at
Morningstar, told CBS MoneyWatch.
"You see it both in terms of actual events that people
can relate to, whether you're a worker with a retirement plan or whether you're
an asset manager that runs a fund. That's one thing," Hale said. "The
other is just the growing, growing momentum for regulation of carbon
emissions."
In the U.S., professional money managers in 2019 used
sustainable investing strategies, including those tied to climate, to manage
one of every three dollars — some $17 trillion in assets like mutual funds and
ETFs, according to a U.S. SIF Foundation report.
By contrast, accurately estimating the potential impact of
climate on retirement portfolios in dollars and cents is hard. That's because
it involves making complicated assumptions about potential environmental
regulations, consequences like sea level rise and the effects of extreme
weather on physical infrastructure.
"It's an enormously complex issue," Hale said.
"There's just no way you could say that ... professional investors have a
handle on it or that it's priced into the market."
A need for better disclosure
Another impediment: Despite growing awareness of the
potential climate impact on companies, for now there are no standards about
exactly how businesses should quantify that threat and to what extent they need
to disclose such "material risks" to the U.S. Securities and Exchange
Commission. The agency is now considering adding a rule mandating climate risk
disclosure for companies.
Unlike private money managers, the government board
overseeing federal employee portfolios, called the Thrift Savings Plan, uses a
"passive" investment strategy — mostly putting people's money in
index funds rather than actively seeking out specialized funds like ESG mutual
funds or ETFs. The TSP is expected to allow individual investors to access a
"mutual fund window" starting in 2022 that lets employees make some
choices, including ESG funds.
Under current law, the TSP is not allowed to direct
investments to specific companies or exercise voting rights to voice an
opinion. Yet it operates the largest planned benefit plan in the U.S. with more
than $700 billion assets for 6 million participants.
"With appropriate education, individuals in that plan
could potentially redirect their investments to [account for] climate risks,
but again that's throwing it all on the shoulders of individual workers who
aren't necessarily investment experts," Hale said.
The wide array of what companies report — or don't report —
can make evaluating risk confusing even for professionals, he added.
Planning for disaster
Climate change doesn't post a threat only to investment
funds meant to safeguard and grow retiree savings. The value of real estate —
typically the single biggest investment Americans make — is also affected by
flooding, drought and other extreme weather exacerbated by global warming.
Homeowners can expect to pay out $20 billion this year tied
to flooding alone, while insurance premiums are expected to rise along with sea
levels, the nonprofit First Street Foundation found.
Residents affected by a natural disaster often see a decline
in credit scores, are more liable to fall behind on bills and can experience a
cascade of financial consequences, including bankruptcy and homelessness, an
Urban Institute analysis found.
Financial experts advise retirees and those nearing
retirement to consider whether they live in a flood plain, tornado or hurricane
alley, or drought-prone area. That could involve taking actions to shore up a
property, like putting a house on stilts or rebuilding a roof, or even moving
to a safer area, said economist Olivia S. Mitchell, director of the Boettner
Center for Pensions and Retirement Security at the University of Pennsylvania's
Wharton School.
"This is a highly disruptive set of events to plan
for," Mitchell told CBS MoneyWatch.
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