What To Make Of The Labor Department’s Request For Comment On Protecting Retirement Assets From Climate Risks

The U.S. Department of Labor announced on Friday publication of a Request for Information seeking public comment on what actions department should take to protect retirement savings and pensions from risks associated with changes in climate.

This Request for Information follows President Biden’s Executive Order on Climate-Related Financial Risk, which directs the Department of Labor to identify actions it can take under the Employee Retirement Income Security Act of 1974, the Federal Employees’ Retirement System Act of 1986, and other relevant laws, to safeguard the life savings and pensions of U.S. workers and families from the threats of climate-related financial risk. Together, ERISA and FERSA provide oversight to more than $13 trillion in assets.

This is a welcome development: current climate models predict a 3.0-4.0°C increase in temperatures by 2100, rendering low-lying islands, many coastal regions, and most of the low and mid-latitudes uninhabitable. 2100 is only 80 years away—approximately the life expectancy of a child born today in North America. Climate change poses existential threats not only to American retirement security, but also to the human race.

The RFI solicits general input on agency actions that can be taken under ERISA, FERSA and other relevant laws, and poses specific questions related to data collection and fiduciary issues under ERISA, the federal Thrift Savings Plan under FERSA and other miscellaneous topics.

Standing on the Shoulders of Giants

Many organizations have done extensive work on frameworks for climate risks, each targeted at a range of stakeholders including customers, employees, policymakers and investors. Luckily, the US Department of Labor can draw from the intellectual property of the Task Force on Climate-Related Financial Disclosures (TCFD) and on International Sustainability Standards Board (ISSB)’s Climate-Related Disclosures Prototype. TCFD, led by Financial Stability Board Head Mark Carney, issued recommendations in June 2017 for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. ISSB relied heavily on TCFD in developing its Climate-Related Disclosures Prototype, which was released in November 2021. 

TCDF and ISSB both consist of the same governance, strategy, risk management, and metrics and targets sections. ISSB provides more granularity by calling for the following cross-industry metrics disclosures:

·         Greenhouse gas emissions: absolute gross Scope 1, Scope 2 and Scope 3, expressed as metric tons of CO2 equivalent, according to the Greenhouse Gas Protocol, and emissions intensity

·         Transition risks: the amount and percentage of assets or business activities vulnerable to transition risks

·         Physical risks: the amount and percentage of assets or business activities vulnerable to physical risks

·         Climate-related opportunities: the proportion of revenue, assets or other business activities aligned with climate-related opportunities, expressed as an amount or as a percentage

·         Capital deployment: the amount of capital expenditure, financing or investment deployed toward climate-related risks and opportunities, expressed in the reporting currency

·         Internal carbon prices: the price for each metric ton of greenhouse gas emissions used internally by an entity, including how the entity is applying the carbon price in decision-making

·         Remuneration: the proportion of executive management remuneration affected by climate-related considerations in the current period

Saïd Business School Professor and KKR and BCG Advisor Robert Eccles explains, “The ideal outcome is that ISSB becomes a global standard that integrates the work of all previous standards and frameworks. Ideally, the Department of Labor can use its standards.”

Beyond Greenhouse Gas Emissions

While most sustainability frameworks focus only on carbon dioxide (CO₂) emissions or more broadly on greenhouse gas emissions, new research suggests that local pollutants (particulates, sulfur dioxide, nitrogen oxides, volatile organic compounds, ammonia) have much higher per-ton health risks and greater financial materiality. Since analysis of multiple pollutants is a better predictor of financial outcomes, capital allocation decisions, and firm behavior than carbon intensity alone, the Department of Labor may wish to consider broadening the scope of the disclosure that it requests if further research supports these results. More broadly, the Department of Labor should continue to revisit its approach as additional research on climate change and financial risk becomes available. 

As the Department of Labor considers the threats of climate-related financial risk, comments from investors, academics, and civil society experts could help convey the importance of using TCFD and ISSB’s frameworks and being open to results from emerging academic research to safeguard retiree interests on a broad scale over the long-term. Comments are due on or before May 16, 2022.