[NOTE: You may wonder why GLYNT – an enterprise software company – is blogging about retirement plans. Because climate risk thinking is pervasive in the financial markets, but may be new to corporate finance professionals. But we all have retirement plans, so perhaps applying climate thinking in a personal situation makes the long-term climate risks clear.]
BlackRock, the investment manager, has put its shoulder behind improved climate disclosures. From annual letters to green loan funds to ETFs to shareholder activism, their voice is loud and clear: Climate change is the greatest investment opportunity in a generation. BlackRock expects that corporate valuations will move in a predictable manner based on exposure to climate risks.
So, if you’re planning on retiring in 2030, 2040 or 2050, how can you incorporate this view into your retirement plan? While this topic deserves a longer post, and GLYNT is not offering financial advice, here are two ways to incorporate the effects of climate change into your retirement planning.
Step 1: What’s your future climate scenario?
Here are three choices, select the one you think will happen. Or test your portfolio against all three.
• Cooperation and Costs. Everyone cooperates and reduces emissions. This scenario arrests climate change, and lowers the cost of physical damage from wildfires, floods and heat, but every company must make emissions reduction investments, which lowers profitability.
• Business as Usual and Costs. No one really reduces emissions. This scenario has high costs of physical damage and constant supply chain disruptions. Profits go down.
• Mixed and Costs. Some businesses spend to reduce emissions but not every business, so there are reduced profits from both physical damage and emission reduction plans.
Pick a scenario and look at your stock selections. How will they fare with physical damage? How will they fare with higher climate change costs in the business environment, such as broken supply chains? Use climate change scenarios — including both business and physical risks –to test your stock selections. That’s what the experts do. It may tilt your portfolio towards specific companies and sectors that bear lower costs as we move into a climate risky future.
Step 2: Hedge
With your scenario in hand, and stocks selected, now take out as much climate risk as you’d like using a hedge. You can invest or short an ETF that is focused on business of climate change solutions, e.g. clean energy companies, under the thesis these are the winners in a world of climate change. BlackRock and others offer ETFs with this focus.
And, you can avoid the sectors that are most likely to get hit with the physical risks of climate change. BlackRock has identified municipal bonds, mortgages and utilities as vulnerable in this regard, because all have very long-lived assets. Municipal bonds, for example, are expected to lose significant value from the high cost of physical damage in our metropolitan areas.
Using this two step process, you can insulate your retirement portfolio from climate change. Don’t expect it to happen? Invest in utilities and short the themed ETFs. Carrying out the hedge might be a bit expensive, but this will also quantify how your views fare relative to the pack, e.g. versus the consensus expectations.
And notice that with a hedge you can be positioned for a positive return under any scenario. Now that’s thinking like BlackRock.
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