Congress’ investigative arm is encouraging the federal employees’ retirement plan to evaluate the financial risks that climate change may pose to retirement plan investments, portending a broader movement to evaluate those risks.
The Government Accountability Office is recommending that the Federal Retirement Thrift Investment Board (FRTIB) evaluate the investment offerings in the Thrift Savings Plan (TSP), emphasizing that the plan should assess its exposure by analyzing the potential financial performance of its portfolio holdings under projected climate change scenarios.
“Taking action to understand the financial risks that climate change poses to the TSP is a useful first step that would help FRTIB be better positioned to consider, as part of its ongoing oversight activities, if any changes are needed to help ensure that the retirement savings of federal workers are protected,” GAO says in “Federal Workers’ Portfolios Should Be Evaluated for Possible Financial Risks Related to Climate Change.”
According to the report, climate change is expected to have widespread economic impacts and pose risks to investments held by retirement plans, including the federal government’s TSP. As of November 2020, TSP had six million active and retired federal employee participants and nearly $700 billion in assets. GAO notes, however, that the FRTIB has not taken steps to assess the risks from climate change, even though it has a process to understand risks and has previously undertaken efforts to address risks. Officials told GAO that they use a passive investment strategy and do not focus on risks to a specific industry or company.
The Backdrop
The report comes following a request by Sens. Jeff Merkley (D-OR) and Maggie Hassan (D-NH), in which they asked GAO to examine what is known about the exposure of TSP’s investment portfolio to risks from climate change, what steps the FRTIB has taken to address such risks, and what plans in other countries have done to address risks.
In their letter to the GAO, the senators note that, “while markets throughout the world are moving to incorporate these risks associated with climate change and stranded fossil fuel assets, the Federal Thrift Savings Plan (TSP)—one of the largest DC plans in the world with more than 5 million participants and $500 billion in assets—appears to be ignoring this issue completely. This inaction places the assets and retirement security of its participants in jeopardy.”
Merkley introduced legislation in 2019 that would have given federal employees the ability to divest from the fossil fuel industry by offering a “climate choice” investment option in the TSP.
The House of Representatives recently approved legislation to require publicly traded companies to disclose to shareholders certain environmental, social, and governance (ESG) metrics. The SEC is also reviewing how best to regulate and guide climate change disclosures with a target release date of October 2021.
GAO Review
As part of its review, GAO examined documents and interviewed officials from selected retirement plans for public- and private-sector employees in the United Kingdom, Japan, and Sweden identified as examples of plans that are addressing climate risks. GAO also reviewed TSP documents and interviewed FRTIB officials.
According to the findings, stakeholders knowledgeable about climate change and financial markets say that climate-related events, from natural disasters to changes in government policy, are expected to impact much of the economy and thereby investment returns.
GAO also found that officials in the United Kingdom, Japan and Sweden who have incorporated climate change risks into their plan management describe using engagement—such as outreach to corporate boards—to encourage companies in which they invest to address their financial risks from climate change. Other steps included incorporating climate change as a financial risk into their policies and practices, and communicating information on climate-related investment risks through public disclosures and reports.
GAO notes that the FRTIB did not indicate whether it agreed or disagreed with the recommendation and stated that it subscribes to a strict indexing discipline and efficient market theory. The report further suggests, however, that even passive investment strategies are exposed to financial risks from climate change. It notes, for example, that the Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission suggests that these risks may not be adequately reflected in current market values, which increases the likelihood of systemic shocks.
