Wharton’s Olivia S. Mitchell talks with Wharton Business Daily on SiriusXM about the federal government’s call to re-examine its pension investments in light of climate change.

Climate change is posing an existential threat to more than just the planet. In fact, the federal government is concerned that weather-related risks will begin eroding the retirement portfolios of its employees.

Earlier this year, the U.S. Government Accountability Office recommended that the board overseeing the Thrift Savings Plan (TSP) for federal workers analyze the financial performance of companies in its portfolio, in light of risks related to climate change and the transition to a low-carbon economy.

Olivia S. Mitchell, a Wharton professor of business economics and public policy, said the recommendation cracks open the door to green investments, unavailable to governmental employees in the past. The TSP, at $762 billion, is the largest defined contribution plan in the world. From next year, it will allow investors to have access to a mutual fund platform so they can tailor their investments to their own desires by selecting from 5,000 mutual funds.

Under the Employee Retirement Income Security Act of 1974, private pension plan fiduciaries must invest exclusively for the benefit of participants and retirees. “That has been interpreted over the years as meaning you can only take into account risk, return, and financial criteria, not green criteria,” Mitchell said during an interview with the Wharton Business Daily show on SiriusXM. (Listen to the podcast at the top of this page.)

From rising global temperatures to more intense and frequent natural disasters, the effects of climate change are already evident, according to the UN’s recent review of the research. For this reason, many argue that the time has come for the federal government to take seriously investments that consider environmental, social, and governance criteria, known as ESG.

“We’re still a long way from reaching a convergence of opinion around what constitutes ESG. The metrics are all over the place.” –Olivia S. Mitchell

Just in the last year and a half, “we’ve seen floods, fires, drought, and more. It’s almost like the pestilences in the Bible,” she said.  “Moreover, climate change is likely to continue. It’s not a question of 10, 20, 30 years in the future.”

Europe Is Ahead of the U.S.

The European Union has pulled far ahead of the U.S. in advancing ESG investment criteria, according to Mitchell. She cited a report from U.K.-based Make My Money Matter, an organization pushing for responsible pension investments, that claimed that “greening” a pension is 21 times more effective at reducing one’s carbon footprint than becoming a vegetarian, giving up airline flights, and switching energy providers combined.

“It’s apparent that the Biden administration is reviewing and will likely reissue regulations that limited ESG investments in the U.S. Nevertheless, it’s a much tougher hill to climb given regulations and case law regarding fiduciary liability.” Mitchell said. “In Europe, sustainable investment has taken over like wildfire. Pretty much the whole E.U. has moved toward requiring firms to reveal their environmental, social, and governance stances, and investors are taking this into account when choosing portfolios.”

Despite the growing call for ESG investments, especially from younger Americans, changing course is difficult because so much is unknown about the long-term performance of such holdings. Mitchell is executive director of the Pension Research Council at Wharton, which recently held a conference about pension investments in sustainable assets. Information presented at the conference showed there is no clear correlation in the data from companies that subscribe to ESG principles.

“We’re still a long way from reaching a convergence of opinion around what constitutes ESG. The metrics are all over the place,” she said.

Some investors don’t mind lower returns on a green investment because they are willing to sacrifice some profit for the good of the planet. But retirees with limited income streams have more at stake, Mitchell said.

Her general outlook on retirement isn’t rosy. The economic damage created by the pandemic and climate change, combined with Social Security’s looming insolvency and the growing debt of older Americans, doesn’t bode well for the golden years.

“People are just going to have to work longer, if they possibly can. And if they can’t, they’d better start looking at where to move where they’re not subject to drought, fires, floods, hurricanes, and all the other things that climate change brings with it,” Mitchell said, adding that those nearing retirement age should consider downsizing their lives.

“Buying an electric car or growing a vegetable garden could be helpful. Because we’re going to need to be more self-reliant in this new world,” she said.