It is a fundamental tenant of financial planning that you need to hedge against risk. Investors are always cautioned to diversify their portfolios (i.e. have a mix of stock, bonds and cash). Further diversify by investing in both U.S. and foreign companies. As you age, become more conservative in your investing to hedge against risk.
With recent developments on climate change, many parallels exist between making decisions regarding regulations of greenhouse gases and financial planning. Even if you are a doubter of climate change, most would acknowledge there is some risk that climate change is occurring and that humans are increasing the risk through emissions of greenhouse gases. The following statement is from NASA regarding the degree of scientific consensus that climate change is caused by human activities:
Multiple studies published in peer-reviewed scientific journals show that 97 percent or more of actively publishing climate scientists agree: Climate-warming trends over the past century are extremely likely due to human activities. In addition, most of the leading scientific organizations worldwide have issued public statements endorsing this position.
Intergovernmental Panel on Climate Change October 2018 Report
Back in 2016, the Intergovernmental Panel on Climate Change (IPCC) was commissioned to prepare a special report on the impacts of global warming over 1.5 degrees Celsius above pre-industrial levels. In assessing the current global warming trends, the IPCC states the following in its report:
Human activities are estimated to have caused approximately 1.0°C of global warming
above pre-industrial levels, with a likely range of 0.8°C to 1.2°C. Global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate.
The IPCC issued a dire warning it its report. Immediate action must begin to keep warning at a maximum of 1.5 Celsius by 2030. If warming exceeds that level, the risk of drought, floods, extreme heat and poverty increases dramatically for millions of people.
Impacts are not just in remote corners of the globe. The United States is already beginning to experience the risk associated with climate change. The Global Change Research Act of 1990 mandated that the U.S. Global Change Research Program (USGCRP) deliver a report to Congress and the President. The 4th National Climate Assessment (NCA4) was released on the heels of the IPCC report. The report is the culmination of work by thirteen federal agencies, including NASA and the Defense Department, with contributions from 300 scientists. The report states the climate change impacts are already occurring in the United States.
National Geographic highlighted the risks discussed in the NCA4 report:
As the report makes clear, different parts of the country face different risks posed by climate change. In vulnerable Southeastern states, coastal flooding is projected to increase dramatically; Charleston, South Carolina, could experience 180 tidal floods in a year by 2045, compared to 11 per year in 2014. In the Southern Great Plains, extreme heat could cause thousands of premature deaths and billions in lost work-hours by the end of the century.
Drought conditions worsened the recent California wildfires. Fortune reported that the recent California wildfires destroyed 6,700 structures. The total cost to the state, homeowners and insurers is expected to exceed $19 billion.
The recent IPCC and NCA4 reports show the dramatic risk climate change presents. If such risk is analyzed in a similar fashion to financial risk, prudent decision making would include taking appropriate steps to mitigate that risk.
U.S. Rolls Back Climate Change Regulations
The Trump Administration has rolled back climate change regulations and has announced its intention to remove the United States from the Paris Climate treaty. Some of the climate change deregulation includes the following:
- Replacing the Clean Power Plan with the Affordable Clean Energy Plan which is a less rigorous regulation of coal-fired power plants;
- Relaxing methane regulations on oil & gas regulation on federal lands;
- Relaxing methane regulations for new oil & gas operations; and
- Review of New Source Performance Standards for greenhouse gas emissions from power plants to allow plants to continue to operate for a longer period of time
With regard to the NCA4 Report, as reported on VOX, President Trump even recently stated he “didn’t believe” the report prepared by his own federal agencies. Even if the President doubts climate change or the likely impacts to the U.S. in the coming years, a prudent course of action calls for managing against the risk.
Even Those in the U.S. Who Still Question Climate Change Should Be Persuaded to Take Action
In discussing risk associated with your investment portfolio, Forbes comments “the higher the level of risk your portfolio has, the more likely you are to experience loss or injury, and the more significant that loss or injury may be.” If you face greater risk, your financial advisor would counsel you to rebalance your investments to reduce your risk.
As discussed above International and U.S. governmental agencies warn the risk of significant impacts due to climate change are increasing dramatically. According to U.S. EPA, the U.S. is the second largest emitter of greenhouse gases in the world. As a result, the climate change risk profile to the U.S. EPA is severe.
Even for those conservatives that are concerned with the impacts to the U.S. economy from climate change regulation, the U.S. risk profile demands taking prudent action to reduce greenhouse emissions.