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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.