CLIMATE CHANGE TO ERODE INVESTMENT RETURNS
By James Malliaros
Greta Thunberg, the teenage climate activist from Sweden who recently delivered a much watched speech at the United Nations in New York, has been celebrated for her activism on climate change, including galvanizing the worldwide, youth-led protests of the last few weeks. Needless to say, she has also become a lightning rod, drawing attacks by television and social media commentators.
But could the impacts of climate change also extend to financial markets and possibly lead to lower superannuation contributions and investment returns in the years ahead? According to the professional body that represents Australia’s actuaries, The Actuaries Institute, the answer is yes.
According to the institute, a higher frequency of natural disasters and increased periods of under or unemployment driven by economies around the world transitioning to net zero emissions, could lead to lower super contributions.
Their latest paper ‘The impact of climate change on mortality and retirement incomes in Australia’, found climate change had negative long-term return implications for investors who were not diversified at a total portfolio level to climate change, potentially leading to lower super balances at retirement.
The paper said that an individual earning around $75,000 per annum could retire with 11% to 18% less, or a super balance of $40,000 to $70,000 less, because of lower contributions and/or lower investment returns. The impact would be greater for those who experience both reduced contributions and investment returns.
The paper went on to say, “The predictions have major implications for individuals, superannuation funds and pension providers, including the Federal Government.” “Two material cost drivers for life insurance and pensions are mortality and investment returns. Climate change is expected to impact on both.”
The paper also noted that there might be a greater reliance on the Age Pension if climate change seriously diminishes super balances, and a higher cost of provisioning for future Age Pension liabilities if investment returns are lower.
The institute said failure to address climate change had been identified “as one of the largest socio-economic risks to modern society. There is mounting pressure on all financial institutions from investors and regulators to improve transparency and the disclosure of climate-related risk.” “Without proper risk management, these megatrends have the potential to overwhelm individuals, private companies and government balance sheets over the course of this century.”
“In terms of public policy, the wide-ranging consequences of climate change on mortality, public health and the economy mean that system-wide policy responses are necessary to mitigate the risks posed.”
This latest paper is part of The Actuaries Institute’s ‘Dialogue’ thought leadership series and is available to read on the Institute’s website.
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