At the time of this writing, the United Kingdom and much of western Europe rest under an unrelenting heat dome that is claiming infrastructure, economic productivity, and lives. Undoubtedly, civil engineers designing British infrastructure, like Luton Airport north of London, looked to the past to calculate the tolerances necessary for the airport's infrastructure. The same can be said for grid operators in Texas and golf course architects in Oklahoma, other regions suffering through intense heatwaves during the summer of 2022. But unfortunately, past temperature and weather extremes are proving a poor analog for the changing climate of the 21st Century. Luton's runway is melting while the power grid fails in Texas and Oklahoma golf courses find themselves with insufficient water to maintain green fairways.

What does this have to do with Californian's retirement savings? The answer is the consistency of human nature. Managers of the nation's largest pension fund are exhibiting similar familiarity those who designed the before-mentioned infrastructure. A recent analysis of the California Public Employees' Retirement System (CalPERS) conducted by Ethos ESG revealed that the $466 billion pension fund might be poorly positioned to cope with the consequences of a rapidly warming planet. 

Ethos ESG, a data and analytics company founded to promote a more sustainable financial system, examined greenhouse gas emission data and emission reduction targets for the public equity portion of CalPERS’ portfolio. The analysis reveals that those portfolio holdings align with 2.98˚C of average global temperature increase. Climate scientists are united in their view that such a degree of warming would deliver far more intense heat, storms, sea level rise, and loss of biodiversity. CalPERS investments are simply not doing enough to transition to a carbon-free economy and are exposing themselves to risks ranging from commodity price instability, regulation, and litigation. 

This is not to say that CalPERS is uniquely negligent. Quite the opposite. The pension's Sustainable Investments Program focuses on identifying and addressing such risks. Ethos ESG rates the portfolio well above average on "climate action" after analyzing 88,000 data points related to CalPERS investments. However, if the current heat waves tell humanity anything, it's that mother nature does not grade on a curve. Above average may still lead to enormous financial losses and diminished benefits for CalPERS' two million members. 

Climate science is also entirely indifferent to investors' political persuasions. Unfortunately, the environmental, social, and governance (ESG) data used to conduct the analysis on CalPERS is now fully embedded in our nation's mounting culture war. Some elected officials decry ESG data as "woke capitalism," a meaningless term that disregards investors' financial well-being in favor of grievance politics. Call any UK, Texas, or Oklahoma resident in July of 2022. It does not matter if they are conservative or liberal, pious or atheist, they are all equally hot and suffering under a thickening blanket of greenhouse gases. Heat-trapping carbon dioxide molecules are unconcerned with our culture war, and the same is true for the economic realities of climate change. The insurance giant Swiss Re anticipates that crop failures, disease proliferation, and sea-level rise associated with climate change will reduce global economic output by $23 trillion by mid-century. It will impact investors. Political memes will offer no respite from financial pain, but education and preparation will.

CalPERS has made strides to insulate its members from climate risk, but the Ethos ESG analysis demonstrates that there is still work to be done. Financial analysts and portfolio managers are still expecting the world of tomorrow to resemble the world of the past. Unfortunately, it will not. The extreme heat waves of 2022 illustrate the need to rethink and prepare. This applies to investment portfolios as much as infrastructure. It may be time to ask yourself if your retirement savings are at risk of melting like Luton's runway.

Dan Carreno is director of business development at Ethos ESG.