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Retirement investing for a warming planet: The impact of climate change Add to ...

Like many people planning for retirement, Olive Dempsey often wonders if she and her husband are investing their money the right way.

The Vancouver couple in their mid-30s are not just worried about whether their choices will allow them to retire. Instead, they also worry about their investments’ suitability to meet the challenges posed by climate change.

“There is definitely a part of me that feels maybe we should be taking all this money and buying land somewhere, preparing for a kind of climate apocalypse,” says Ms. Dempsey, who works in the public sector.

Her husband, Ben Ernst, is co-owner of Earnest Ice Cream, a sustainably-run business integral to their retirement. They believe any investments of their profits should mitigate the melting of the polar ice caps instead of accelerating it – and they’re not alone.

The couple, who have a young daughter, are among a growing number of investors seeking climate-friendly investments. A 2014 survey by 350.org, an international advocacy group for reducing carbon emissions, found that 90 per cent of the mostly North Americans they polled were prepared to consider fossil-fuel-free investments.

To Matt Horne of the Pembina Institute, it’s a heartening trend, especially given that even the best-case scenario for climate change means retirement will probably be considerably more costly than today.

“If we are successful in averting the worst effects of climate change, there are still on balance changes that will be economically negative – but at least manageable,” says Mr. Horne, the associate regional director for the B.C. branch of the Canadian clean-energy think-tank.

For example, food costs are already rising as weather becomes more unpredictable and severe, he says, and could increase substantially because of climate change, a study by the Intergovernmental Panel on Climate Change estimates.

The effect on investments could be very negative as well. A 2015 study by the Economist Intelligence Unit estimates the global effect could be the equivalent of a loss of about $4.2-trillion (U.S.) – roughly Japan’s gross domestic product. At the more ominous end – a rise of 6 degrees – the effects of climate change could cost $13-trillion, about 10 per cent of global GDP. (By comparison, the Great Recession erased about $34-trillion of market wealth.)

It may be imperative that governments meet their pledges made at the recent United Nations Climate Change Conference in Paris to avert the worst of these costs. Investors can do their part, too, by investing retirement savings into climate-friendly options, says certified financial planner Stephen Whipp.

“I’m thinking, what kind of world am I leaving for my kids?” says the Victoria-based adviser specializing in fossil-free investment.

Millennials are particularly sensitive to the issue, often asking: “My parents screwed it up, so am I going to add to that with my investments?” he says.

Younger Canadians are also more apt to invest sustainably. A 2015 report by Morgan Stanley found millennials are twice as likely than older generations to invest in companies or funds with an environmental focus. (The study also found women are more likely than men to do so.)

Yet for those seeking fossil-fuel-free investments, the options are few and far between. Responsible investment (RI) options are growing in Canada faster than their non-RI counterparts, and yet many still hold “best of class” oil and gas firms, Mr. Whipp adds.

“The mutual funds firms are really only now offering fossil-fuel-free options.”

Although AGF has been offering its Global Sustainable Growth Equity Fund since the 1990s, others like IA Clarington only recently announced two of its RI funds are divesting firms involved in fossil-fuel production.

Investors turning to RI because it’s the right thing to do for the planet might also be doing the best thing for their portfolios, according to a 2014 report by Ceres. The study by the non-profit, sustainable-development organization estimates an additional $36-trillion of investment in green-energy solutions will be required by 2050 to avoid climate change’s worst effects.

And investors – particularly millennials – will likely drive the shift toward clean tech, says Mr. Whipp, managing director of responsible-asset management with Wolverton Securities.

For the time being, however, going fossil-fuel-free can be costly. AGF’s offering, for example, has a 3.19-per-cent management expense ratio. Lower-cost exchange-traded-fund options, such as the PowerShares Cleantech Portfolio (PZD), are mostly only available in the United States and are pricey for Canadian investors because of a foundering loonie.

Lesser-known options generally need a minimum investment, such as Wolverton’s Integrity Fossil-Fuel-Free Portfolio, which requires $10,000 to invest and is only available to Wolverton clients.

However, some firms are now catering to small investors. Among them is Montreal-based CoPower, now offering an RRSP-eligible green bond with a minimum investment of $5,000, in recognition of the dearth of green fixed-income options for retail investors.

“The majority of green bonds are sold to institutional investors so it’s hard for the average individuals to participate,” says Trish Nixon, CoPower’s director of investments.

“This allows them to invest in positive solutions and be part of the solution and move toward a clean-energy economy.”

Lauryn Drainie, a 28-year-old working in the non-profit sector, is considering such an investment. “I like that I would be investing in my community and can actually visit the projects.”

Until recently, she had not given investing for retirement much thought. Only now that she has money to save is she realizing how much climate change factors into her decisions.

“As time goes on, I think fossil-fuel investments will be more risky, and the renewable energy investments will be more stable and as a result much better for someone planning for the long term,” Ms. Drainie says. “At least that’s my hope.”
 

Global consulting firm Mercer recently released a report on how climate change will alter measurements of investment risk. Its 2015 report outlines four areas:

Technology: the rate of development of technology for a low-carbon economy.

Resource availability: the effect of chronic weather patterns.

Impact: the effect of catastrophic weather events

Policy: effectiveness of governments reducing human-caused impacts.

Moreover, the study estimates that over the next 35 years, increased focus on these areas will positively affect renewable-energy investment, boosting the annual median returns by more than 3 per cent, while oil and coal could be negatively affected, lowering average annual returns by 4 and 5 per cent respectively.

 

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