In January 2019,The Wall Street Journal dubbed the bankruptcy of the major utility company PG&E in California “the first climate-change bankruptcy,” adding that it probably won’t be the last.
The financial risk of climate change is real. Newspapers highlight the financial risks of the changing climate in a range of articles referencing studies and white papers written by top management consulting firms.
The financial service industry typically doesn’t look further out than three to five years when evaluating the risks of an investment, yet the effects of climate change need to be looked at over a much longer time frame.
Mark Carney, governor of the Bank of England, referred to this mismatch as the ‘tragedy of the horizon’.
Bank regulators are aware and are starting to work on regulations to reflect the evolving climate change risks. Yet, at the individual level, it’s still far from straightforward how to be a driver of change.
As an example, most of us employees still can’t redirect our 401(k) retirement savings into Socially Responsible Investing (SRI) or sustainable investment options.
Here is the back story. Having college-age children pretty much automatically leads to hearing about young adults asking colleges to divest from the fossil fuel industry.
Since I agree with the principle, I took the initiative and tackled our family portfolio of investments. As with most of us, the savings we have in our retirement plans, in our case 401(k), is typically invested in different types of mutual and index funds.
SRI, also known as mission-based investing, sustainable investing, impact investing, and ESG investing (investing according to ESG criteria [Environmental, Social, Governance]) is a key element of creating an economy that works for people and the planet.
It minimizes investments in companies with poor social, environmental, or corporate governance records and instead focuses on companies that are leaders in those issues. Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices.
Over the past 20 or so years professionally managed assets in SRI grew from $639 billion to $12 trillion. And it’s projected that this growth trend will accelerate dramatically over the next two to five years.
Given this growth in professionally managed assets in SRI and the simple fact that retirement saving is for the long term, up to 40 years or more, why is it then that my retirement plan doesn’t provide an SRI option so that my investments can be reflective of what the solutions will be in the next few decades?
When I asked my boss about SRI/ESG investing options to our company’s 401(k), he referred me to our human capital associate who confessed to having never even thought about the potential financial risk (physical or transitional) of climate risk especially on long term investments like retirement funds.
I have made my suggestion known, but haven’t heard back yet and my expectations are low given my experiences this far. However, it’s important to talk to people about the issues we are facing.
A little side note, while chatting with my human capital associate she mentioned her top concern: Many millennials are not contributing to retirement funds/ 401(k) as they are busy repaying student loans and have no money left over to plan for the future. That’s a different issue altogether but one we shouldn’t forget addressing.
The internet provides a slew of information on how to identify green investment options and fossil-free action toolkits which basically all come down to convincing your retirement plan manager to add sustainable investment alternatives.
But getting retirement plan managers to listen needs time and a convincing mass of employees that are demanding these investment alternatives. It’s frustrating as I believe employees should have the option to direct retirement money in a way that aligns investment goals with overall values and beliefs.
According to the most recent data from the Investment Company Institute, Americans are saving almost $6 trillion in 401(k) retirement accounts. That’s a lot of money and could collectively have an impact on companies’ ESG behavior.
So this holiday season please take some time to email your retirement plan manager and suggest to add SRI/ESG investing options.
I will close with this quote that actually applies to almost all aspects of our existence:
“If we don’t urgently change our way of life we jeopardize life itself”
