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Lack of climate risk analysis in US federal retirement fund sparks concern

by David Sherfinski | @dsherfinski | Thomson Reuters Foundation
Monday, 12 July 2021 00:05 GMT

ARCHIVE PHOTO: A protester holds a bucket of coal during a demonstration demanding Japan to stop supporting coal at home and overseas, at the G20 Summit in Osaka, Japan, June 28, 2019. REUTERS/Jorge Silva

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The largest U.S. public retirement fund isn't directly taking global warming threats into account, despite President Biden's promise of a "whole of government" approach to climate change

* Federal watchdog warns of climate risks to retirement fund

* U.S. lawmakers eye divesting from fossil fuels

* States, cities take separate steps to curb risk

By David Sherfinski

WASHINGTON, July 12 (Thomson Reuters Foundation) - The board overseeing the largest public retirement plan in the United States has not comprehensively assessed the risks climate change poses to its investments, a U.S. federal agency says, sparking fears retirement savings pots could be at risk.

The Federal Retirement Thrift Investment Board (FRTIB) says its investment strategies already price in such risks to its portfolio as they track broader indices of companies coming under new pressure to disclose climate risks.

But federal investigators tasked with ensuring climate risks are accounted for in all areas of the government say the board "has not assessed the potential investment risks that climate change poses" to the Thrift Savings Plan (TSP).

The TSP, established by Congress in 1986, is a pension-like fund for the U.S. federal workforce and has about 6 million participants and $735 billion in assets as of April.

The striking findings, detailed in a government watchdog report released last month in response to a congressional inquiry, threaten to impede President Joe Biden's push for a "whole of government" approach on climate change.

They also run counter to efforts in a growing number of U.S. states and cities to ditch fossil fuel investments in their own pension funds to try to lower risks.


The Government Accountability Office (GAO), the watchdog agency that conducted the study, recommended the retirement board's executive director re-examine the investment plan "in light of risks related to climate change."

In response, Executive Director Ravindra Deo said the board is closely monitoring requirements for broader climate-related disclosure but considers that the plan's portfolio adequately takes climate risks into account as it is required to track key indices.

"There is material disclosure of climate risk by individual firms currently, even if imperfect," Deo told the GAO, saying he believed market forces effectively priced in the risks.

One difficulty in shifting investments in response to climate risk is that the statute governing the retirement plan bars the board from directing investments to specific assets or exercising voting rights associated with securities.

In its report, the GAO noted that "officials said that if they found a particular company to be at heightened risk from climate change they could not change how any of TSP's funds are invested in that company to account for the risk."

Separate managers oversee each of the funds operated under the board's supervision.

Deo said the board, with advice from consultants, will review the funds it invests in over the next budget year starting in October.

Its most recent review, in 2017, didn't result in any recommended additions to the TSP fund line-up, he said.

The board did sign off on a new "mutual fund window" that gets around the statute's investment restrictions by allowing plan participants themselves to take a more active role in picking climate-friendly funds, starting in summer 2022.

Lawmakers in Washington want to go further.

U.S. Sen. Jeff Merkley, a Democrat from Oregon, is among those pushing legislation to establish an advisory panel to assess climate risk. It could pave the way for a new portfolio option that excludes any investments in fossil fuel companies.

"This crisis is... putting individuals' life savings, and our entire economy, at major risk," Merkley told the Thomson Reuters Foundation.

That risk "has led some of the world's largest and most sophisticated investors to begin divesting from fossil fuel projects," he added. "Our hardworking federal employees, who number in the millions and work in every state across America, deserve the same option."

Merkley, along with Sen. Maggie Hassan, a Democrat from New Hampshire, had asked for the GAO investigation into how the retirement board is factoring in climate-related risks.

The plan's board has formally opposed Merkley's legislation, saying it would gut the concept of passive investing - or tracking other indices - by forcing members to "pick winners and losers."


But officials elsewhere in the United States, notably in the state of New York and New York City, have begun taking steps to divest their own public retirement funds from fossil fuel interests.

Maine Governor Janet Mills, a Democrat, signed legislation last month directing officials in her state to remove roughly $1.3 billion in fossil fuel investments from the northeastern state's $17.6 billion public employee retirement fund by 2026.

Biden issued an executive order in May instructing his administration to take a comprehensive look at climate-related financial risks. The order directed the Labor Department to assess how the federal retirement board is factoring in those risks.

The U.S. Securities and Exchange Commission (SEC) also is planning to issue new climate change risk disclosure requirements for public companies by October, chair Gary Gensler told Congress in May.

The GAO has pointed to retirement plans in Britain, Japan, and Sweden as examples where officials similarly use a "passive" investment strategy but have nonetheless taken steps to cut climate-related exposure.

That has happened in part by actively encouraging companies to be transparent about their own climate risks and, in Sweden's case, publicly naming companies that drill for oil in the Arctic or oppose climate change legislation, for example.

The watchdog acknowledged those officials may have more power to invest or divest from specific funds than the Washington-based board.

While acknowledging its legal restrictions, climate-smart investors say the board's hesitance to take a closer look at climate threats poses an unacceptable risk to current and former federal employees who now rely on the funds, or will in the future.

"The market is absolutely not pricing (climate risk) in," said Steven Rothstein of Ceres, a U.S.-based nonprofit working to reshape economic systems to address climate and other risks.

"Is the board really saying that they cannot do anything to prepare for a risk and meet their fiduciary responsibilities?"

Emily Kreps, who works on capital markets for non-profit group CDP, said it's particularly important for governing boards to understand current systemic risks to pension and retirement funds.

"I recognize it's a daunting task, but it is concerning because these types of risk assessments do need to be undertaken," said Kreps, whose group runs a global environmental disclosure system for companies, cities, and states.

"I disagree with the fact that these risks are priced in," she added.

Related stories:

Is your pension fuelling the climate crisis?

London, New York mayors urge cities to divest from fossil fuels

Rich nations under fire for funding 'bridge fuel' gas overseas

("Reporting by David Sherfinski. Editing by Laurie Goering. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)

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