Climate Change, Risk Management, and the Freedom to Invest Responsibly


Risk management is so simple a concept and so central to financial analysis that it feels superfluous to even mention it. Yet when it comes to climate change and sustainability, efforts are under way across the United States to impede our ability as investors to conduct simple risk management. Policymakers have proposed and even passed laws that make it more difficult, if not illegal, for investors to consider the financial risks of climate change.

These efforts are misguided. The freedom to invest responsibly and the principle of risk management must be defended, and that requires us to go back to basics.

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Does climate change pose financial risk? The answer is clear. Drought, heat waves, and extreme weather all exact a signficant toll from infrastructure, supply chains, facilities, and people. Indeed, the United States recorded $165 billion in losses from climate disasters just last year. But the climate crisis also presents enormous opportunity. The Inflation Reduction Act has driven a clean energy boom across the country. Investors should not have to sit it out.

Informed by these facts, investors have increasingly integrated climate considerations into their decision making precisely because the financial effects are so clear. They are acting on sound, rational logic, and governments should not interfere with that process.

Yet some states have instituted new laws forbidding investors from taking climate change impacts into account when assessing bond issuances, pension fund management, and other government contracts. In effect, they are penalizing risk management.

Ignoring a financial risk does not make it go away; it only makes it worse. Whether on individual balance sheets or across a national economy, failing to account for and address potential threats has a significant downside. Investors need data to assess these risks and the freedom to act on that data based on their business considerations. Their fiduciary duty requires it.

When investors lack these essentials, markets are less efficient and less effective, and everyone invested in those markets suffers. If there are fewer financial institutions competing in the marketplace, states will be forced to pay millions more in extra interest payments. And if states work only with institutions that do not consider climate- and sustainability-related risks, they will expose their pension funds, beneficiaries, and taxpayers to the downsides of those risks.

Most investors understand the threat and are responding as they should: by studying the data, following the trends, and keeping a watchful eye out for risks and opportunities. But being rational market actors isn’t enough.

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That’s why investors and private and public sector leaders have joined together to urge policymakers to protect every investor’s right to incorporate climate and sustainability risks into their decision making. They are making a clear statement that executing their fiduciary duty should not be subject to government interference. Such interference will only make it harder for them to do their jobs and serve their clients.

That is why we all need to stand up, speak out, and demand the freedom to invest responsibly.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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