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Managing Climate Risk in the US Financial System (September 2020)A report commissioned by federal regulators overseeing the nation’s commodities markets has concluded that climate change threatens U.S. financial markets, as the costs of wildfires, storms, droughts and floods spread through insurance and mortgage markets, pension funds and other financial institutions.
“A world wracked by frequent and devastating shocks from climate change cannot sustain the fundamental conditions supporting our financial system,” concluded the report, “Managing Climate Risk in the Financial System”
How this plays out at the individual investor level puzzles me. Even if we can guess the three likeliest short-term outcomes (say, increases in extreme weather, greater number of "orphaned" assets, a push for more-sustainable energy generation and distribution), I'm not exactly sure of how to act on the information. Do you simply dodge carbon? Look for "impact investors" who actively seek to mitigate effects? Shift to financials on the premise that insurance companies make money from catastrophic events (high short-term payoff offset by even higher premium increases)?The United States and financial regulators should review relevant laws, regulations and codes and provide any necessary clarity to confirm the appropriateness of making investment decisions using climate-related factors in retirement and pension plans covered by ERISA, as well as non-ERISA managed situations where there is fiduciary duty. This should clarify that climate-related factors—as well as ESG factors that impact risk-return more broadly—may be considered to the same extent as “traditional” financial factors, without creating additional burdens.
© 2015 Mutual Fund Observer. All rights reserved.
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Comments
I think ultimately the big traditional energy players will acquire the alternative energy ones as the competition from solar and other players becomes more viable as it has already been each year. Then ESG investors will really be scratching their heads as to what to own. An affordable electric car isn't far off, yet I don't necessarily think Tesla will be the one to make it. Telecommuting thanks to climate change and covid will become the norm to reduce traffic, carbon and office space. Avoid office real estate. Avoid insurers of coastal properties in Florida.
Anecdotal story I heard from one realtor who does business in Florida, that most mainstream insurers no longer want to insure Florida's coastal homes and the insurers that do charge exorbitant rates and actually model for a binary situation--either disaster doesn't happen and they're hugely profitable or it does happen and they go bankrupt and screw policy holders. Bankruptcy is modeled in.
But I wonder if the investment thesis is really what matters at this point. There needs to be real government regulation--on a global level--to reduce the inevitable destruction.
“ The risks from climate change include damage to infrastructure, housing, crops, communities, and livelihoods, as well as to the value of financial assets, according to the report, which argues that systemic shocks related to climate change can undermine the financial health of banks and insurance markets.
It makes 53 recommendations, including that financial supervisors require bank and nonbank financial firms to address climate-related financial risks, that companies make meaningful disclosures about climate risk, and that U.S. and financial regulators provide clarity to confirm the appropriateness of making investment decisions using climate-related factors in retirement plans.”