Financial Planning in the Age of Climate Change

This transcript has been edited for clarity.

Brittany Damico: Thank you for tuning in to Rewilding Wall Street, where we provide insights and analysis into the ever evolving world of sustainable investing. I'm Brittany Damico.

Dan Carreno: And I'm Dan Carreno.

Brittany Damico: And today, Dan and I want to share a piece that we have recently created titled Financial Planning and the Age of Climate Change. This piece is unique for a couple of reasons. The first being a focus on financial planning. Most of our conversations are usually centered around the interplay between climate change and capital markets, whereas this piece zooms out and takes a bit more of a holistic view of how financial planners can really integrate the necessary and omnipresent aspects of climate change into their client plans. Secondly, it is unique because it is inspired by the personal experiences of our very own Dan Carreno. So Dan, why don't you share a little bit about your story and where this inspiration was derived from.

Dan Carreno: I think a lot of people, when they consider the parts of the country that are on the front lines of climate change and the impacts of it, they think about California with wildfire risk. They think about Florida with hurricane risk. I am a Colorado resident, and I can tell you that this is also one of the states that's really on the front lines, due also to wildfire risk like California. So the experience that my family had is that last year in 2023, our community was dropped by our insurance carrier due to increased wildfire risk. When we went out to market to find a replacement insurance policy, very few providers were even willing to provide a bid at that point. In fact, there were only three that would provide a bid. During that bidding process a fire broke out about five miles away, which was a little scary. But of course, in response to that fire breaking out, two of the insurance carriers pulled their bids, leaving just one willing to write a policy with zero competition. So, as you can imagine, they could basically name their price, and they did just that. And they named a price that was not 13% higher. It was actually 13 times higher, which was a huge hit to the community. They had to do a special assessment. All the residents had to write a pretty large unexpected check for this insurance policy. So that was a bit of a shock to the system. And at the same time that this happened, we had a 100-year storm roll through the valley that we're in and dump an unprecedented amount of precipitation in the valley. Our house flooded for the first time ever. So on top of the insurance issue, we were dealing with a boatload of property damage at the same time. It was all very unexpected and it was a substantial financial hit that our family was not prepared for. And it really got me thinking that this is happening to hundreds, thousands, millions of people across the country, and I don't hear too many people talking about it. So, we did some research and put together this piece to start a conversation amongst the financial planning community to start preparing people for all of the different ways that climate change is impacting the financial wellbeing of the American household.

Brittany Damico: I'm really sorry that that happened to you. That sounds like something that nobody would want to go through. And unfortunately, I think it's a story that there's probably a lot of individuals out there can relate to. And so, I think it's an important conversation to bring up in terms of this financial planning in the age of climate change. So, let's dive in. We divided this paper into six separate yet wildly interconnected sections, and I say we take a look at each section, and you can share a few more specific insights that relate to the impacts of climate change that these financial planners should be taking into consideration. Does that sound good?

Dan Carreno: Sounds like a good place to start. So, first let's talk about property damage. The home is the primary asset for most people in terms of their net worth. And the most recent data that we could find was in 2021, about one in ten American properties were damaged by climate hazards and extreme weather totaling about $57 billion in damages. And then on top of that, the cost of repairing these homes has surged more than 400% in the last three years according to Angie's List. So not only are we just seeing more property damage writ large, but we're also seeing that it's more expensive to cope with that property damage. Now, most people would say, I've got insurance. Why do I care? Well, you may or you may not, depending on where you are in the country. So I shared my personal experience, this is obviously something that is impacting households across California, Florida, and other hurricane prone regions. And everybody thinks that it's probably limited to those areas. I can tell you that it's not. Actually one of the biggest areas of insurance dislocation in the country currently is Iowa. Why? Hail. Hailstorms are becoming more frequent, they're becoming more severe, and there are communities in Iowa that cannot get home insurance. And so there's a report that was conducted by a nonprofit called the First Street Foundation that found that about a quarter of all US real estate is exposed right now to increasing insurance premiums. Many of those premiums are going up about 63%. And then, huge portions of the rest of the United States is effectively at risk. The First Street Foundation refers to an insurance bubble, where this is coming for a lot more areas in the U.S. Ultimately, this filters down to the value of that real estate. That same study by the First Street Foundation found that in Florida, when a home is dropped by its insurance carrier, on average, they saw the property value decrease by 19 to 40%. It's a pretty significant hit. If you think about how most homes are change hands in this country, in order to get a mortgage, you have to have an insurance policy. So if you're looking to buy a home, and you can’t fine insurance, you're not going to be able to bid on that home and the price of the home starts dropping due to lack of demand. It's something that we feel people need to be aware of and it just really hasn't kind of sunk into the consciousness of the country just yet.

Brittany Damico: Okay. So that covers pretty much the first half of the paper. The next part of the paper really digs into income and retirement savings. So touch on those. Tell me a little bit more about how that relates in terms of planning.

Dan Carreno: The first thing that we talked about here was general cost of living. There are a couple of different ways to think about this. Number one, we will likely see persistently high inflation numbers associated with very specific types of goods in the economy. For example, we've seen coffee and cocoa prices skyrocket due to droughts, floods, and crop failures in the parts of the world that are producing those commodities. And we could talk about how climate change is impacting global trade. Traffic through the Panama Canal is down about 40% lately due to drought. So you can see how this is just driving up costs, and that's something that we think people should be aware of. And then, there are some cost of living aspects here that are positive. And one thing that many people don't think about is how incentives through legislation, like the Inflation Reduction Act, can really benefit the finances of American households. For example, people that need a new furnace, could have gotten a heat pump at a fraction of the cost because of all of these incentives. In the state of Colorado, we have access to those incentives through the inflation reduction Act, but we also have state and local incentives as well as rebates coming directly from the utility. I recently just got a quote for a heat pump because I need to replace my furnace in the next couple of years, and I wanted to be proactive it. And I can tell you that the quote came back where 52% of the cost of the heat pump is being covered by the incentives and the rebates. It's, it's saving a huge amount of money for my family.

Brittany Damico: I'm so glad that you brought that up because I feel like when we go through these types of conversations and we're looking at climate change, so much of the conversation ends up being doom and gloom. So it's nice to come up for air, talk about incentives, opportunities, and I think you're on the right path of being more proactive. I think that's a really important aspect that people should be taking into consideration.

Dan Carreno: Unfortunately, the reality of it is that most of the impacts of climate change are on the negative side of the ledger. There's a quote here from the US Department of the Treasury: “Climate hazards can cause income loss, increased expenses, and place additional burdens on American household savings credit and insurance coverage.” So better to prepare for these things than to be blindsided by them like I was in in the last couple of years. So, to round out the conversation, the other things that we identified that are concerns in the financial planning process as well. Climate change is certainly impacting income for a variety of professions out there, especially those that are tied to outdoor labor. For example, if somebody is a contractor building homes as their profession and relying on outdoor labor, not only do we see the increased temperatures in the summer reducing productivity, but we're increasingly seeing more regulations employed by the states requiring shorter hours, more breaks for the safety of the laborers. It’s something that is obviously going to impact the bottom line of that construction business. And then finally, the last thing that we highlight in the paper is our retirement savings. It's important to consider from a planning perspective that if you are using financial planning software, eMoney for example, and that is conducting Monte Carlo simulations to project the probability of a successful retirement, it is assuming that we are still operating in the same kind of stable climate environment that we've been in for the last 12,000 years. And the sad reality is that is officially now in the rear view mirror. The point is that a lot of those projections that we've relied on for so long in our industry might be fundamentally flawed. There's one quote that I really like from our paper and I'll share here. “In so many of the mathematical equations that govern our existence, constants are being replaced by variables.” That applies to the insurance actuary tables, and it applies to these Monte Carlo simulations as well. that financial planners need to be increasingly aware of.

Brittany Damico: I could not agree more, and I also really love that quote in the paper. It's one of my favorites. So thank you, Dan, for taking us through this deep dive, going through all of these different segments. For all of the planners who are listening, what are some of the actionable steps that they can take to learn more?

Dan Carreno: To start, it's a good time to conduct an insurance review, working directly with the client or working with their insurance agent. But I think it's a good time to start helping them understand what are the trends in their region, and if at some point in the not too distant future, if they are going to be impacted by these insurance issues that we've been talking about. And then, of course, it makes sense to make the client aware of how that could impact their real estate value. For example, if a client has been planning to sell a home in California and move to Idaho, they may want to factor this insurance issue into the decision making about when they do that. Because if it looks likely that they're going to get dropped by their insurance carrier in the next couple of years, moving quickly on the sale of that property could ultimately end up saving them hundreds of thousands of dollars. We also talk about emergency funding for property damage. We also talk about speaking to clients about what home improvements they may be making and making sure that those clients are aware of the tax incentives and rebates that are going to be available to them. Finally, is thinking about those projected retirement income needs and factoring that into the planning process. Maybe becoming a bit more conservative on spending or a bit more aggressive on the savings rate that somebody needs to reach. So, with all of that in mind, we provide just a few ideas for additional reading to get more fluent on this topic. The three things that we list are that paper from the US Department of Treasury, the title is The Impact of Climate Change on American Household Finances. The next is the report is from the First Street Foundation and that is titled The Ninth National Risk Assessment: The Insurance Issue. And then finally, there is some really scintillating reading here from the IRS, Credits and Deductions under the Inflation Reduction Act.

Brittany Damico: Well, we will start wrapping up there. Before we go, we are going to take a few minutes to chat around the campfire. This is our usual segment where we go around the horn and briefly share something that we've come across recently that's been interesting, inspiring, or just otherwise thought provoking. So, Dan, if you were sitting around a campfire sipping some scotch, what would be the thing that you would want to chat about?

Dan Carreno: I have to chat about my experience recently going to the Sphere in Las Vegas. So, if anybody is not familiar with this, it is a new concert venue that is this enormous bubble. I describe it as an IMAX theater on steroids. And it is just an unbelievable entertainment experience. The one thing that I really like to share that I think is difficult to get is that the sound inside this venue is like nothing I've ever heard. No matter where you are in this venue, the sound is perfect. And if you're a music fan, the experience is like nothing I have ever seen before in my life or heard for that matter. So, if you see one of your favorite bands performing at the sphere in Las Vegas, my recommendation is to drop everything and go see them there. It's that good.

Brittany Damico: For mine this week, I have just been doing a very nerdy deep dive into a book that I recently read, Eat Like A Fish from Bren Smith. It is all about 3D vertical ocean farming. And essentially that means we utilize the ocean to produce food in a way that is not extractive, but incredibly productive and actually heals an ecosystem. You can grow things like seaweed, shellfish, and it's just this really amazing story about his journey. And to me the biggest takeaway is that it is the only type of food production that doesn't require any additional inputs. Meaning, if you're on land, it requires fertilizer, additional water, soil, all of these different components. Whereas in the ocean, you just set up your infrastructure, put the seeds in, and then as the farm grows and heals the area in which the farm is growing. And as a resident of Washington, I am very seriously looking at and interested in trying to figure out how to do it because I think it could be really amazing. Well, we'll wrap it up there. For those that are interested in more information about O-Six Impact Partners, please feel free to contact us through the website if there is anything we can do to support your sustainable in investing ambitions. Thank you for tuning in today, and we will be back soon with another episode of Rewilding Wall Street.

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