Climate change erodes investment returns

The impact of climate change could extend to lower superannuation contributions and investment returns, according to the Actuaries Institute.

A higher frequency of natural disasters and/or increased periods of under or unemployment driven by economies around the world transitioning to net zero emissions could lead to lower super contributions, the firm’s latest paper found.

The 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, which could lead to lower super balances.

This was within a backdrop of climate changes such as a triple in heatwave occurrences by 2060-2080, leading to an amplified number of deaths among the nation’s elderly.

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The paper said that an individual earning around $75,000 pa 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 predictions have major implications for individuals, superannuation funds and pension providers, including the federal Government,” the paper said.

“Two material cost drivers for life insurance and pensions (annuities) are mortality and investment returns. Climate change is expected to impact on both.”

The paper noted that there might be a greater reliance on the Age Pension if climate change seriously diminished 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,” the paper said.

“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.”