Issue Briefs

The Federal Reserve has reported that mispricing of assets poses a risk of downward price shocks and could thereby make climate change a risk to stability of the financial system.

Following are key parts of a GAO report recommending that the TSP assess the risk to investors of climate change, a report that closely follows an order by President Biden to have the Labor Department review how the TSP has taken environmental, social, and governance factors, including climate-related financial risk, into account when deciding on its fund offerings.


Investment risks associated with climate change are expected to impact the global economy and cause unprecedented disruption to the financial markets, and investors, including retirement plans, are considering how their portfolios may be exposed to these risks. Passive investment strategies, like those used by TSP, are generally seen as providing the important benefits of broad diversification and low costs, leading to greater risk-adjusted returns when compared to active investment strategies. However, even passive investment strategies are exposed to financial risks from climate change as the impacts are expected to be widespread across all economic sectors. Climate and financial experts urge passive investors and others to consider the unique and systemic risks posed by climate change. As noted by the Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission, these risks may not be adequately reflected in current market values, which increases the likelihood of systemic shocks. Similarly, the Federal Reserve has reported that this mispricing of assets poses a risk of downward price shocks and could thereby make climate change a risk to stability of the financial system. In addition, the Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission reported that climate change over time will likely touch virtually every sector and region of the country. Moreover, selected retirement plans in other countries are assessing the impacts of climate change on their portfolios and have leveraged their knowledge to develop strategies for addressing these risks as part of their passive investment approach.

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In managing the TSP, the FRTIB has not explicitly assessed the potential financial impact of climate change on the $700 billion in assets it manages for 6 million active and retired federal workers. FRTIB is subject to requirements different than those for the plans we reviewed in other countries, which affect what actions it may take. However, FRTIB has a process to understand risks and has previously undertaken efforts to address risks. Including consideration of climate change as part of this process would provide FRTIB more complete information about potential risks relevant to its passive investment approach. Taking action to understand the financial risks that climate change poses to the TSP is a useful first step that would help FRTIB be better positioned to consider, as part of its ongoing oversight activities, if any changes are needed to help ensure that the retirement savings of federal workers are protected.

Recommendations for Executive Action
The Executive Director of the Federal Retirement Thrift Investment Board, to better inform the Board’s ongoing oversight activities, should evaluate TSP’s investment offerings in light of risks related to climate change.

Agency Comments and Our Evaluation
We provided a draft of this report to FRTIB for review and comment. In written comments, reproduced in appendix II, FRTIB did not indicate whether it agreed or disagreed with our recommendation. FRTIB noted that it subscribes to a strict indexing discipline and that the efficient market theory concludes that the market is pricing all risks into its valuation on an on-going basis. FRTIB stated that its next investment consultant review is planned for fiscal year 2022 and that it would review any recommended changes to its fund offerings at that time. FRTIB further stated that it would examine any recommendations made by the U.S. Securities Exchange Commission and the Federal Stability Oversight Commission on climate change-related risks and determine whether and how to apply those lessons to the TSP. FRTIB also stated that it disagreed with a statement in our draft report that it did not currently have any knowledge of the potential financial impact of climate change on TSP assets. We removed this characterization from the report.

GAO recognizes that FRTIB has an established process for evaluating TSP’s investment options and utilizes an investment consultant to conduct a review. While the most recent investment consultant review in 2017 did not include any consideration of climate-related risks, its next review in 2022 is an opportunity for FRTIB to conduct a focused evaluation of these risks and clarify what additional steps, if any, are needed. Given the systemic and unprecedented risk that climate change is expected to have on global financial markets, GAO continues to believe that it is important for FRTIB to evaluate TSP’s investment offerings for these risks. While FTRIB stated that its upcoming mutual fund window would provide TSP participants with an opportunity to invest beyond the five core funds, the mutual fund window does not address the potential climate change-related risks to TSP’s core investment funds. Examining climate change-related risks facing TSP’s $700 billion in assets under management would provide FRTIB with a greater understanding of its potential exposure to these risks and enable it to decide if any further actions are necessary to protect the retirement savings of over 6 million federal workers.

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