It's time to talk to clients about wealth risks of climate change

Most of us have heard the quip attributed to Mark Twain: "Everybody talks about the weather, but nobody does anything about it." As advisors, we may not be able to do anything about the weather, but we do need to be prepared to talk knowledgeably about climate change with our clients and about its potential to affect their lives, their net worth and their portfolios. 

Last month I read about a wealthy southern California community where houses were being ripped apart by an accelerating series of landslides due to heavier-than-normal rainfall. Subterranean layers of soil that had been relatively stable for decades on the cliffside community of Rancho Palos Verdes had begun to slip, causing dangerous breaks in gas lines, blackouts and irreversible property damage.

Since my practice is based in northern California, I'll admit to an initial sense of relief that my clients lived and owned property hundreds of miles away from that beleaguered community. But on further consideration, I realized that the problems caused by changes in climate, with the resulting instances of extreme weather events and other natural disasters, have implications beyond the Southern California real estate market. 

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From New York down to Miami, sea level rise poses a real and growing threat to coastal communities. All along the Gulf Coast, increased residential and commercial development, coupled with shrinking wetland areas, make storm surges and — as we've seen over the last weeks — flooding from hurricanes affecting more and more people and property. 

And it's not just the coastal areas. As weather patterns shift, meteorologists have noticed that "Tornado Alley," typically comprising large portions of Texas, Oklahoma, Nebraska and Kansas (remember the twister that took Dorothy and Toto over the rainbow in "The Wizard of Oz"?) has begun to move east, bringing more of these damaging storms to southern and Midwest regions not accustomed to dealing with them.

Related to these concerns, the direct financial impacts of climate change on the insurance industry are immediate and ongoing. 

Property and casualty insurers are being forced to raise their rates and even, in some cases, rethink the coverage they offer. The National Flood Insurance Program (NFIP) — a federal program offering the only recourse most homeowners have for coverage of weather-related water damage to their homes — is being forced to rethink its standards for underwriting and anticipating future risks. 

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Climate change and clients' homes

As financial advisors, we're familiar with talking to our clients about sources of uncertainty as they impact the financial markets and client holdings, so it's important for us to be informed and even proactive about the potential impacts of climate change.

An obvious place to start is with their real estate holdings. Are they managing their insurance coverages in a way that realistically limits their liability? If they own vacation property in an area threatened by earthquakes or even, as in the example above, landslides, are they aware that most property insurance does not cover damage caused by ground movement without the addition of a special rider or endorsement? If they live or own property in areas prone to hurricanes or flash flooding, do they have proper coverage through NFIP? 

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Perhaps most important, have they kept their coverage levels in line with the (likely) increased replacement value of the property? Are there cases where we should perhaps even advise clients to consider divesting themselves of property poised to become a bigger financial risk as the effects of climate change continue to progress?

Climate change and portfolios

Next, we may need to help our clients consider some of the secondary implications. Are they overexposed in investments that could be adversely affected by climate shifts, such as insurance, agriculture, food processing, recreation and even energy as governments consider regulations on sectors associated with fossil fuels? 

The rising costs of mitigating the effects of climate change in areas like infrastructure, food supply, health and energy production will almost certainly generate a drag on global gross domestic product. Consider that the National Bureau of Economic Research estimates that for each one degree centigrade of increased average global temperature, the world loses about 12% in GDP.

READ MORE: Ask an advisor: How can I invest to fight climate change?

What about opportunities?

On the other hand, we should be prepared to discuss opportunities that may arise from climate shifts. After all, human beings are inherently resilient and creative. 

With global attention focused on the problems posed by a changing world climate, it is likely that innovation will result in profits for those poised to seize them. While "green" investing may not generate the types of returns that create instant wealth, it seems likely that, over time, technologies and industries that contribute to solving these types of problems may play an ever-larger role in the global economy. The global trend toward sustainable investment seems poised to continue.

The bottom line is, as always, is to make sure we are listening to our clients and keeping both ourselves and them informed on the topics that matter to them. While many of our clients may not feel much concern in these areas now, it seems likely that all of us will be touched by some aspect of climate change as time goes on.