The Impact of Climate Change Risk on Retirement

October 2025

Authors

Dr. Mingyu Fang, FSA, FCIA
Director Actuary, RBC Insurance, Canada

Dr. Tony S. Wirjanto
Professor, Department of Statistics & Actuarial Science and School of Accounting & Finance,
University of Waterloo, Canada

Dr. David Saunders
Professor, Department of Statistics & Actuarial Science,
University of Waterloo, Canada

Minh Chau Nguyen
Ph.D. Candidate, Department of Statistics & Actuarial Science,
University of Waterloo, Canada

Executive Summary

In this project, the financial impacts of climate change risk on retirement investing are studied, with a focus on managing such risk from the perspective of pension funds. Two main components of climate change risk studied are:

• Physical risk: direct impact of extreme climatic events and global warming on assets and pension liabilities.
• Transition risk: financial risk arising from the process of adapting to a lower-carbon economy, including litigation risk related to the compliance to new protocols.

The effects of these risks on both the asset side and the liability side of pension funds’ balance sheets are elaborated in this report, of which the key insights are summarized below:

1. It is beneficial for pension funds to incorporate climate change risk in their investment decision-making process due to the impacts of climate change on long term asset return as well as pensioner mortality, which have been concluded by the existing literature and further explored in this study (Chapter 1).
2. Using a representative set of stocks, climate change risk is found not to have been fully recognized and priced by both European and North American financial markets. In such a situation, this elevates the potential of future price correction and creates uncertainties for pension funds that have a high level of exposure to carbon-intensive assets (Chapter 2).
3. Quantitative methodologies are proposed in this study to assess the impacts of climate change risk on the asset side of the balance sheet, including fixed-income assets, equities, and stranded assets (Chapter 3). The associated numerical results show that:
   • In the long term, the adverse impacts of transition risk on bond values are projected to be higher for issuers with higher carbon intensity levels and higher debt-to-value ratios;
   • For equities, stocks from carbon intensive sectors (energy, utilities, and materials) and the real estate sector are expected to be negatively affected by climate change. In contrast, sectors such as health care and information technology are expected to remain resilient or even benefit from climate change.
4. On the pension liability side, climate change risk can have significant impact on human mortality. As such, a regression analysis is adopted to quantify the net association between temperature change and mortality rates (Chapter 4). The empirical results based on U.S. population mortality data lead to the following findings:
   • Mortality rates of individuals between 40 and 80 years old decrease as temperature increases;
   • Mortality rates of individuals above 80 years old increase as temperature increases.
5. Aside from the quantitative analysis above, there are additional practical considerations of climate change risk for pension funds (Chapter 5):
   • Green bonds have been shown to be a suitable candidate for pension investments, although fund managers should be mindful of the issue of potential greenwashing.
   • Climate change has direct and indirect impacts on real estate property values through multiple channels, calling for a thorough analysis to assess the net impact.
   • Climate change risk may lead to new perspectives in the suitability of many existing default options of defined contribution (DC) plans, such as balanced funds and target date funds.
6. Drawing from the aforementioned insights and an existing liability-driven portfolio construction framework, the authors propose a portfolio optimization framework reflecting the impact of climate change for a defined benefit pension fund to achieve the desired risk-return profile in terms of funding status. A numerical example is carried out in this study to illustrate how this methodology can be applied in practice. Extension of the framework for applications in DC fund and personal retirement investing is also discussed (Chapter 6).

Material

The Impact of Climate Change Risk on Pension and Retirement Investing

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