Global warming could melt our pension savings

Dóra Fazekas explores what impact climate change will have on assets and pension funds.

Are fund managers already assessing these risks on savings?

What do they need to adequately assess the threats and prepare for the challenges to come?

A recent out of court settlement not only brought a huge pension fund to its knees in front of a client’s claim, but also produced a historic statement which should stand as a warning sign to the entire global financial sector to take climate change and sustainability seriously.

As part of the agreement that put an end to a two-year legal procedure against the Retail Employees Superannuation Trust (Rest) in Australia, the fund – which has $42 billion funds under management – was forced to state that “climate change is a material, direct and current financial risk” to Rest and its investments which come from the pension savings of tens of thousands of retail workers in the climate-hit country-continent.

An out of court settlement is a rare victory for a single pension fund member against a large organization of such size, power and legal capacity. The one in question here is of great significance, because it is one of the first few cases where a large financial player admits that its long-term investment policies did not factor in the impacts and risks posed by climate change.

If until now anybody still thought that climate change is an issue that could cause a headache to oil companies, energy conglomerates, carmakers, and other players of industry alone and the financial sector sits in glorious isolation from the direct effects of climate issues, this is a clear signal that there will be no exceptions from the changes.

Pension savers are planning ahead for climate change impact

Those people at the beginning of their careers who are just starting to save up for their pension years will retire sometime in the 2050s – the period addressed by most climate pledges and predictions. It is false to believe that all those predicted changes will take effect at New Year’s Eve 2049. In fact, our environment will go through a change in the course of the next 30 years – and the change will be enormous.

What will mankind have to change in order to reach the climate goals set out in the Paris accord? What happens if we don’t reach those goals? Which sectors and companies will still operate by then? Which ones will lose partially or fully their current value and significance? Those starting to save up now planning ahead for their retirement in a few decades can surely expect that the institutions to which they trust their money are already actively and responsibly assessing such changes and risks and how different the world will be by then. A number of factors around us will be different for sure, but several elements and their effects contributing to the changes can be calculated fairly precisely. Models and other analytical tools that exist today can help us plan for a very different future.

Three significant impacts for the financial sector

1 Portfolios managed by financial institutions will undergo dramatic change

The most obvious is the one illustrated by the example from Australia: in the next decades the portfolios managed by financial institutions will undergo dramatic changes. Where will the companies be in 30 years in a completely different environment that are currently valued highly? How much will their shares be worth by then? How can one identify the companies and markets that do not exist now – or maybe are in their infancy – but will be producing the largest profit in 30 years? How can such questions be answered by fund managers today and what tools are available to help them?

2 Operational impact

The second large impact will be the one hitting financial institutions from an operational aspect. How many branches will a bank need? How much work can be taken over by artificial intelligence? How will operational costs be different as a result of climate change?

3 Value of financial institutions

The third effect financial sector players can expect will be the one hitting their own valuations. Depending on how they will be pricing the first group of impacts and what steps they take to rectify the second one, the value of financial institutions can change drastically – along with their access to financial sources necessary to fund their long-term business. Players not sufficiently prepared for the challenges can fail spectacularly, bringing down governments, institutions, companies and millions of private investors with them.

Climate change is a new and different crisis

In the 2008-2009 financial crisis a large number of financial sector players went bust, while many were saved by the recovery measures. In the current crisis caused by the global pandemic both national governments and the European Union inject fresh funding into the economy via financial institutions, which also supports the financial sector.

Climate change will be very different from those two past crises: it is highly unlikely that similar one-time central funding will be sufficient to save the losses. Not that liquidity will be scarce but the environment will be completely new.

The good news is that climate change doesn’t happen overnight, the way the financial bubble burst or a previously unheard-of virus started spreading in humans. We already see it coming and in fact it is here in many forms. The companies, institutions and organizations that move now, start applying new approaches and install new processes will not simply survive the coming crisis, but will be outright winners and dominant players in the new world. Through their new programs these companies will gain access to new markets, opportunities and resources.

This is how today’s players in the economy can and should understand sustainable investment and sustainable financial planning. This is what the humble retail worker was expecting his pension fund to understand, as well: to see how much his pension will be worth amidst all the changes.

Economic metrics and modelling necessary to calculate the changes are all available today and are becoming more and more refined. We only need the financial sector to discover this and commit to change.

Click here for our sustainable investment service and find out how we can help you prepare for the financial impacts of climate change.

Dóra Fazekas Managing Director (Hungary) df@camecon.com

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