Financial Independence & Climate Change Investing – The Not-so-strange Bedfellows

Investing, Resources, Strategy / Sunday, August 30th, 2020

Climate Change is a word so often used and abused that perhaps the only times anyone thinks about it is when freak weather conditions descend upon us causing bushfires, flooding, heatwaves or extreme cold fronts. That’s not to say we don’t take notice when Greta Thunberg gives a call to action at the World Economic Forum. Some of us even show support at Climate Change Strikes. But our attention wanes quickly as the news cycle turns and some bigger, badder news item takes its place.

Year after year, the United Nations and scientists keep coming up with damning reports about how we ought to reign ourselves in, how we’re tipping the earthly balance to the point-of-no-return. And year-after-year our politicians, in their infinite stupidity, continue to deny it all and sit on any action that can potentially be taken to bring us back from the brink. Of Course they do all this in the service of their election donors, who find this whole narrative of Climate Change not-quite-suitable to their ambitions.

The younger lot gets mad at our politicians for their short-sightedness, but they can’t vote yet. The wealthy baby boomers that make up their vote bank are much more concerned with their wealth here and now. And so the status quo persists.

But here are some stark facts about how climate change will affect us that should make us sit right up, take notice and then take some action through Climate Change Investing.

Fact: Australia is the Fifth Worst-affected Country in the World by Climate Change

The Global Future Study undertaken by WWF expects Australia to be 5th Worst-affected country by Climate Change.

A report published by the Australian Actuaries Institute finds that the health and finances of Australians are at risk in the coming years as a result of Climate Change. Heatwaves, the most deadly natural hazard in Aus are expected to increase significantly in the 21st century further increasing the number of lives it claims every year. Older people are expected to be the most vulnerable.

Source: The Global Future Study, WWF

Fact: Household Expenses will Increase Manifold

Climate Change will lead to increased incidences of drought and heat waves making fresh water scarcer. This is expected to lead to increase in water costs by 34% by 2100. Water scarcity and a decrease in pollinating insects will also affect the agriculture sector globally with the food prices projected to go up as high as 80% by 2050.

Life and property insurance is expected to become more expensive and in some cases may not even be available such as property insurance for homes in areas that are expected to be affected by rising sea levels or recurring bushfires.

Climate Change impacts in Australia: Projections 2100

Source: IGCC Report – From Risk to Return (2017)

Fact: Long-term Returns could Fall by 1% p.a.

From an economic perspective, rising temperatures will have a negative impact on GDP Growth globally. Growth will be affected through various channels. Agricultural and industrial output will decrease, energy demand will increase while labour productivity will take a dip. Investment returns will also be negatively affected across all sectors but will be most impacted for Coal and Oil & Gas. Australia being so reliant on these sectors is expected to be more sensitive to this negative impact and by 2050, the returns from ASX 200 will be 0.7% p.a. lower than those for 2019 according to the report by Australian Actuaries.

Another report from investment advisory firm Frontier Advisors on the impact of Climate Change on long-term returns is equally damning. They have lowered the likely returns that an investor can expect across all asset classes by 0.25% per annum in the best case scenario and by as much as 1% per annum in the worst case scenario. While at the face of it, these numbers don’t look that daunting, but look closely and you’ll notice that these are per annum figures. The impact therefore will be compounded every year

Impact of Climate Change on Long-term Returns in Australia

Fact: Climate Change could Reduce our Retirement Funds by 18%!

The long-term negative impact of Climate Change is expected to reduce the accumulated superannuation balances of retirees on an average by 18% and will also reduce the retirement income by 5%. 

The implications of this are especially relevant for the FIRE community that is looking to retire early. Losing around one-fifth of our projected retirement savings could mean that our Early Retirement timeline would be pushed out. Meaning, we will have to work for more years just to make up for the expected shortfall to achieve Financial Freedom. Once we do Retire Early, there will always be the impending possibility that we may have to come out of our retirement to work again.

Solution: Attention Goes Where Money Flows (When Investing) or Doesn’t (When Spending)

It’s amply clear that we and our wellbeing are going to be significantly affected by climate change. As we grow older, we will be in the age-group that is going to be the most vulnerable, expenses will sky-rocket, our homes will be at the risk of being lost to erratic weather conditions, our investments will underperform and our retirement nest-egg may not have enough funds to support us all the way.

To win any game in life or on the field, there are two things you need: A good offence & an even better defence. By being more mindful about our spending and investing habits and planning our retirement carefully, we can mitigate the climate change risk considerably.

Climate Change Investing – A Good Offence

Even if the governments don’t take the appropriate action, there’s plenty that we can do to not only slow down climate change but also safeguard our own investments.

(a) Find a Super Fund with a Climate Change Mandate

This is perhaps the simplest way to make sure that your money is flowing in the right direction. Australia Super, HostPlus, HESTA and UniSuper are some of the Super Funds that have defined policies for climate change investing. Except for HostPlus, the others are also signatories of the Climate Change 100+ Group that support the Paris Agreement and the need for the world to transition to a low-carbon economy. 

Responsible Investment Association of Australasia (RIAA) conducted a study of all the MySuper funds and found that the five year returns of the funds using responsible investment strategies were 8.14% p.a. These were much higher than the average returns for all the MySuper funds which sat at 7.98% p.a. Here’s a list of the 14 most green super funds according to RIAA. Making better returns while also investing responsibly, that’s hitting two birds with one stone!

(b) Investing in Sustainable (ESG) ETFs

ESG (Environmental, Social & Governance) investing has emerged as a new investment strategy. It focuses on investing in companies that are developing cutting-edge technological solutions to climate change ranging from improving energy efficiency to renewable energy & storage solutions to alternative meat. With the financial sector now starting to focus on the impact of climate change on returns and risk, investing with the ESG attributes in mind has come increasingly in focus. 

In view of the increased demand over the past few years, there has been a huge growth in the product development of ESG investment products. Experts estimate that ESG will become one of the most important elements of investing in the coming decade. They also expect that in the next 20 years, ESG funds will have US$20 trillion under management, which is the same size as that of S&P 500 i.e. HUGE.

We’ve captured below a list of some of the Ethical ETFs and Managed Funds that are listed on the ASX along with their management fees and 1 Yr returns. You will see that the ETFs with global shares have offered great returns over the past one year despite it being such a tumultuous time. The ETFs that have invested in Aussie shares haven’t done as well as the Managed Funds, however it is important to note that most of these were actually showing double digit 1 Yr growth before COVID-19 hit. If you want to do a deeper dive, this is a good resource from ETF Bloke.

Note: I still haven’t started investing in an ESG ETF yet. I intend to start with the next investment that I make. My need to invest in an ESG fund to combat climate change was what triggered this blog post. You can find out more about our investment portfolio here.

ASX codeFund nameFees (% p.a)1-year returnSector
IMPQeInvest Future Impact Small Caps Fund (Managed Fund)0.9912.93%Australian small/mid cap shares
FAIRBetaShares Australian Sustainability Leaders ETF0.490.86%Australian shares
GRNVVanEck Vectors MSCI Australian Sustainable Equity ETF0.35-1.78%Australian shares
INESInvestSMART Ethical Share Fund (Managed Fund)0.9717.59%Australian shares
RARIRussell Australian Responsible Investment ETF0.45-11.92%Australian shares
ESGIVaneck Vectors MSCI International Sustainable Equity ETF0.5512.19%Global shares
ETHIBetaShares Global Sustainability Leaders ETF0.5929.93%Global shares
VESGVanguard Ethically Conscious International Shares Index ETF0.1814.98%Global shares
GBNDBetaShares Sustainability leaders Diversified Bond ETF – Currency Hedged0.492.48%Global fixed income
VEFIVanguard Ethically Conscious Global Aggregate Bond Index (Hedged) ETF0.262.62%Global fixed income
ASX Listed ESG ETFs and Managed Funds

Sources: SelfWealth, ASX

(c) Reduce consumption

This one needs no explanation at all. The reason we’ve accelerated climate change and promoted unsustainable practices in the first place is because of our ‘consumerist mindset’. We’re running after more and more and thinking about the consequences of our actions less and less. 

As FIRE enthusiasts, we’re already trying to reign some of that irrational exuberance in as we look to minimize our costs, so we’re already on this path. There already are quite a lot of resources online about reducing consumption, but these are the three things that we do most often:

  • Switch to reusable products – Such as using glass containers instead of plastic.
  • Donate, swap or sell – We do this quite often. We are part of several PIF groups and have scored some great stuff from there such as our bed. We also like to buy second-hand wherever possible. All our furniture is currently bought off Facebook Marketplace or Gumtree.
  • Buy only as much as you need – Be it food, clothes, shoes, toiletries or anything else you like to spend on, buy only as much as you need (or perhaps less). We’ve stopped going to the mall to avoid temptation. Although I’m still working on my shoe fetish!

Climate Change Investing – An Even Better Defence

As they say, the best offence is a good defence. These are things we can do to defend ourselves from the forthcoming impact of Climate Change

(a) Increase the 25x Rule of Retirement to 30x Rule

If our retirement funds are going to be ~20% less than what we expect them to be, that would mean that we would have to bolster it up before we retire. If we assume that we would still continue to have a 4% withdrawal rate, it is possible that the yearly growth of our investments would be limited to 3% and not the usual 4%. We would therefore be much better off retiring after we’ve amassed 30x of our annual expenses, instead of the usual 25x.

(b) Plan to Move to Another Part of the Country (or World)

It’s clear that a lot of places will become unliveable. Ravaged by freak weather or too hot or too dry or all of the above. These areas may also end up becoming uninsurable. It’s worthwhile thinking about how our investments especially in property and other physical assets will continue to remain protected. There is research now available predicting how each part of Australia and the world will fare as the globe continues to warm up. Our FIREd status would make it extremely easy for us to move around. Using that to our advantage, we should look at investing in areas that are expected to be less affected and divest from those that will bear the brunt.

(c) Buy a Homestead, Learn Farming and Become Self-dependent

This may be a bit out there and quite an alien way of life for us city-dwellers. But it’s always good to be prepared for such an eventuality. This may be too apocalyptic, but there may come a time when we may have to feed off the land that we live on. So while we hope for the best, we should prepare for the worst. The best thing is that this way of life is totally ‘FIRE Approved’.

Like Captain Planet says, the Power is Yours….

Ms. FieryIce

Disclaimer: This blog is based on our understanding of financial instruments and anyone reading is recommended to do their own research.

2 Replies to “Financial Independence & Climate Change Investing – The Not-so-strange Bedfellows”

  1. Amazing read Ms FieryIce!
    We have recently changed our super to Australian Super and started banking with Bank Australia (they don’t lend or invest in unethical businesses, gas, oil, etc.).
    Climate change is very close to our hearts, as it should be for everyone. We also recently invested in ETHI. I’m just glad that we can invest in ethical ETFs without having to sacrifice the nice gains!

    1. That’s awesome and thanks for the comment.
      We are going to start investing in sustainable ETFs shortly. With returns comparable (if not better!) to other index funds seems like a simple decision. It’s great to see that investors like yourself are already aware and investing in a conscious and sustainable manner.

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