Climate change is going to endanger your retirement fund if you manage to make it that far, new analysis shows

Retirement might be a secondary concern (Photo by Dan Kitwood, Getty Images)
  • Climate change is being factored into financial forecasts, with new analysis predicting investments returns will shrink as the full effects of global warming take hold.
  • Frontier Advisors have downgraded all return expectations this year by 0.25%, with modelling suggesting it could rise to a 1% decline annually approaching the year 2100 if appropriate government action is not taken.
  • Across a working life, that is set to amount to hundreds of thousands of dollars in lost retirement savings.
  • Meanwhile, separate analysis by ratings agency Moody’s shows that the greater frequency of natural disasters is also expected to see more Australians default on their home loans.

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Climate change is the phenomenon that keeps on taking. First, it threatens the very survival of life on Earth. Now, assuming we manage to escape extinction, it could rob you of a comfortable retirement anyway.

This year you can expect all investments to perform worse as a direct result of climate change, investment advisory Frontier Advisors has warned.

“As a result of analysis we have completed across a number of themes in this year’s review, we have lowered the likely returns we believe investors can expect, across all asset classes, by 0.25% per annum – the primary driver of this downward revision [being] the long-term impact on the global economy of climate change,” principal consultant Philip Naylor said in a note on the findings.

While small, that downward revision was based on the “best case” result which was that governments effectively reduce their carbon footprint, allowing that the impact would be “far worse” if they did not heed the calls of activists.

“There are costs of transitioning to a low carbon economy, but the long-term costs of global warming and extreme weather events are far greater. There are a number of possible future scenarios with the degree of impact dependent on a range of different policy path responses policymakers make in the future,” Naylor said.

Frontier also provided forecasts for how investments would be adversely affected going forward, with the impact becoming more pronounced over time without significant policy reform.

How climate change will hurt your investments over time. (Source: Frontier Advisors)

The best-case scenario would require the world to keep temperatures from rising globally by any more than 2 degrees Celcius. With government inaction making that version of the future appear highly unlikely, it would keep lost returns to below 0.25%. If all of the pledges from the Paris Agreement were met, lost returns could be kept below 0.5% by the end of the century.

The greatest difference, however, comes in the no-action model, where lost returns would approach 1% heading into the year 2100. While even that erosion sounds small, it becomes serious when compounded over a working life – with the average worker impacted to the tune of hundreds of thousands of dollars at retirement age.

The report is just one example of the growing awareness of analysts of how climate change will affect the hip pocket. In separate research from credit ratings agency Moody’s, it is also expected to hurt the ability of Australians to buy a house as natural disasters become more common.

“Natural disasters can disrupt economic activity and reduce incomes, as well as lower property values in affected areas, all of which raise the risk of mortgage delinquencies and losses,” associate analyst Joanne Kung said in a note supplied to Business Insider Australia.

“Such disasters can also result in significantly lower property values in affected areas.”

As environmental disruption continues to intensify, it’ll both hurt house prices and hurt incomes as the greater economy weakens. That, in turn, will suppress the ability of homeowners and investors to make their mortgage repayments, Moody’s warned.

It’s just one more thing to worry about if and when we do manage to survive climate change.

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