A car drives north to escape the Bond Fire as it crosses Santiago Canyon Road near Southern California’s Silverado Canyon on Dec. 3, 2020.
Leonard Ortiz | Getty Images
Shifting priorities and portfolios
As retirees feel the effects of wildfires, deep freezes, hurricanes and flooding, some have altered their investing philosophies.
Some clients want to shift from fossil fuels while embracing climate-friendly investments, said Nicole Middleton Holloway, CFP and founder of Strategy Squad in the San Francisco bay area in California.
These so-called ESG investments, which stands for environmental, social and governance, may target companies focused on low carbon, climate awareness, green bonds, clean energy or other sustainability-focused options.
However, the specific investments and allocations vary by client, she said.
For example, an investor with a moderate risk tolerance may shift a small portion of their stock allocation, typically 8% to 12%, to green economy-focused assets.
But someone with an aggressive portfolio may still prefer to cap their exposure at 12%, Middleton Holloway said.
“They don’t want it to be a huge portion of their portfolio,” she said.
Typically, clients will diversify their investments by choosing exchange-traded funds or mutual funds, with 400 climate change-focused options available worldwide as of last December, according to Morningstar.
Although these assets tend to be more volatile, many investors have seen strong returns, said Middleton Holloway. Plus, they believe it may be safer than long-term exposure to fossil fuels.
“There’s a risk-return trade-off,” she added.
Diversify for long-term investing
Those retiring in their 60s may need 30 years of investment income, possibly into their late 80s and 90s, McGlothlin said.
“We need a portfolio that is going to last and is going to last a long time,” he said.
One client believes the world’s reliance on fossil fuels may decline in the future and asked to shift their portfolio accordingly, McGlothlin said.
In Texas, many of his clients own land or so-called master limited partnerships, a type of publicly traded asset, invested in oil rigs. As a result, falling oil prices directly impacted their finances during the pandemic.
It feels to me like the past year has brought this to the forefront.
John McGlothlin III
Financial planner with Southwest Retirement Consultants
“They saw how quickly their income streams were significantly reduced or just stopped,” he said.
The swift blow to their wallets was a “wake-up call,” sparking the desire to diversify their retirement portfolios.
“It feels to me like the past year has brought this to the forefront,” said McGlothlin.
Investors poured $51.1 billion of net new money into ESG assets in 2020, setting records for the fifth consecutive year, according to Morningstar.
Climate change policy
