'We should recommend investment solutions that align with a survivable future'

The climate emergency is terrifying and having spent a long summer writing about climate risk and financial planning and scaring myself senseless, I had found my happy place and gone for a day sail in Chichester Harbour on our little sailing boat.  

I was trying very hard not to think about climate risk.  

But that email jolted something in my head. As I sailed past a raw sewage outlet pumping its disgusting effluent directly into my way, I realised today would be another futile day if I continued to ignore the signs all around us.

I recalled another recent conversation, on another day sailing, this time with my friend who works as an academic in the field of sustainability. He was providing feedback on my report "Theory of Sustainable Financial Planning", which I was in the process of developing.  

"The problem is Seb, you are presenting +1.5C as if that is a safe temperature, where you don’t need to worry about climate impacts.

"It is not, +1.5C, if you will forgive this analogy, is like swimming in a river of s**t. You are almost out of your depth, you are up to your neck in it. At +2C it is up to your mouth, and much beyond +2C drowning in it becomes all but certain. It’s not a nice place to be."

From a financial planning risk perspective, let's call +3C the end.

It’s an analogy that seemed strangely suitable for the zeitgeist of our times and our lovely waterways, but not what you expect to hear from a climate scientist, who usually talks in graphs and stats.

But that was why we had gone sailing. To translate the graphs into real language that we can all understand.

With that analogy ringing in my head, I tried to organise my thoughts on climate risk.

Let’s start with the consequences of global heating. Most scientist agree that the human species will go extinct somewhere between +4C and +6C above pre-industrial global average surface temperatures.

From a risk perspective then, let’s call +4C functional extinction and 100 per cent loss of global GDP. Game over.

But everything is not fine at +3.9C either. We know that crops (just like humans) have a thermal tolerance and that global agriculture becomes all but impossible in a future world that is +3C hotter than pre-industrial average.  

Imagining the collapse of global agriculture is not a nice exercise.

Some humans somewhere will survive, even as positive heating feedback loops continue to push the temperatures ever higher, but with the collapse of agriculture, it seems reasonable to assume that civilisation falls with it and that it is unlikely that you or I (or our clients) will be among the survivors, so from a financial planning risk perspective, lets call +3C the end.

Between +2C and +3C life becomes increasingly difficult to sustain and civilisation strains at its seams. The end is inevitable, we face the challenge of working out how to lead a good life in a crumbling ecology.

Can financial planning help people define and plan a meaningful life in such a scenario? Maybe. But I don’t want to do the job.

So that leaves us with future scenarios worth planning for, that are well below +2C, which happens to be the agreed future of the global economy if you believe the word of politicians. 

This is the realm of adaptation and mitigation. This is something that financial planning can help with. To help us avoid the hottest scenarios, and to consider the various risks we face even in the most optimistic of future scenarios.

We need to have conversations about the limits of financial planning.

But is financial planning up to the task? Not in its current form.

Currently we look back at the past and based on past patterns, we make assumptions about the future that do not take account of climate breakdown.  

We simultaneously tell our clients that if they invest more into a portfolio of investments that is funding HSBC, Barclays, Exxon, and BP then they will lead long, happy and prosperous lives, even as we undermine their future.

We need a set of assumptions about the future that takes account of climate science.  

Then we need to think about the risks that our clients will be exposed to. These risks will be physical, transition and zeitgeist risks.

We need to have conversations about the limits of financial planning – there is no point to financial planning in a hot house world. And we need to start pricing in the cost of transition and adaptation to our clients' financial plans.

Finally, having used forward-looking assumptions that take account of climate risk, discussed the risks ahead and which ones can be mitigated, or adapted to, and factored in the cost of mitigation and adaptation, we should recommend investment solutions that align with a survivable future.

In other words, if it is not OK for a client to live in a world hotter than +2C, then it should not be OK to invest for a world hotter than +2C.

If we can follow these simple principles, then maybe we can create a new sustainable financial planning model.

Sebastian Elwell is director of Switchfoot Wealth