Risk management is a fundamental concept in financial analysis, yet current efforts within the United States are impeding investors’ ability to consider the risks of climate change as it pertains to sustainability. These efforts are misguided and threaten the basic principles of risk management and freedom to invest responsibly.
Climate change presents clear financial risks, with significant tolls from droughts, heat waves, and extreme weather, as evidenced by the $165 billion in losses recorded last year in the United States. However, it also presents opportunities, such as the clean energy boom driven by the Inflation Reduction Act. Investors should be allowed to consider these factors.
Consequently, many investors have begun integrating climate considerations into their decision-making, as the financial effects are undeniable. Policies that forbid investors from assessing climate change impacts in their financial decisions hinder progress and penalize risk management. Failing to account for and address these potential threats has significant implications for individual balance sheets, national economies, and markets in general. Investors need the freedom to act based on their business considerations without government interference.
If markets are limited due to restrictions on financial institutions, states will bear additional costs, and pension funds, beneficiaries, and taxpayers will be exposed to unnecessary risks. Investors understand the need to incorporate climate and sustainability risks into their decisions, but they require the freedom to do so. They have united to defend this freedom and affirm that executing their fiduciary duty should not be subject to government interference.
It is essential for investors and private and public sector leaders to press policymakers to protect the rights of investors to incorporate climate and sustainability risks into their decision-making. This is not just about executing fiduciary duty, but also about market efficiency. All individuals and entities need the freedom to invest responsibly.
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All posts represent the author’s opinion and should not be considered as investment advice. They do not necessarily reflect the views of the CFA Institute or the author’s employer.
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