Greenhouse gas emissions (GHG) and resulting climate warming are causing significant, deleterious consequences for the global economy. These consequences are predicted to grow as GHG emissions grow. Prior studies estimate that unmitigated climate change will decrease world gross domestic product (GDP) by $23 trillion by 2050; recent studies indicate the long-term costs may be six times higher than previously estimated.[1],[2]

These effects will have a particularly significant impact on workers’ retirement savings. A substantial portion of retirement plan beneficiaries have longer term investment horizons. “The longer term the investment horizon, the more likely it is that climate will not only be a material risk, but the most material risk,” to retirement savings finds Plansponsor.[3]

Climate-related portfolio risk requires new ways of managing risk. As noted by International Finance Corporation, “the traditional way of managing risk through a shift in asset allocation into increased holdings of more conservative, lower risk, lower return, asset classes may do little to offset climate risks.”[4]

While Broadcom has acted to reduce its operational GHG emissions,[5] it has not meaningfully reduced the emissions generated by its retirement plan investments. The Plan’s most popular option is the Vanguard Target Retirement Funds series which accounts for 28% of plan assets.[6] These funds invest heavily in high-carbon companies and companies contributing to deforestation.[7]

Risk from Plan investments in climate-damaging companies are especially perverse when viewed from the perspective of younger workers.[8] Such investments help fuel the climate crisis and lock in future temperature increases, making negative economic impacts to their retirement savings more likely over time. The savings of younger workers will therefore suffer relatively higher impact from climate-related declines in global GDP than older workers’ retirement savings. Many of the anticipated financial costs of climate change are already being experienced by Broadcom employees. A recent report found that Broadcom 401(k) participants could have earned an estimated $207 million in additional returns if the Plan had not been invested in fossil fuels over the past ten years.[9]

Federal law requires retirement plan fiduciaries to act in beneficiaries’ best interests, including ensuring the prudence of plan investments. Companies that fail to address these concerns may struggle to attract and retain talent, as job seekers are increasingly prioritizing firms with responsible retirement options.[10] Recent regulatory amendments have confirmed that managing material climate risk is an appropriate consideration for retirement plan fiduciaries.[11] Our company can best ensure it is meeting its obligations to employees — especially younger employees — by appropriately mitigating climate risk in its retirement plan investments.

[1] https://www.nytimes.com/2021/04/22/climate/climate-change-economy.html

[2] https://www.ucl.ac.uk/news/2021/sep/economic-cost-climate-change-could-be-six-times-higher-previously-thought

[3] https://www.plansponsor.com/in-depth/climate-change-benchmarking-risk-retirement-plans/

[4] https://documents1.worldbank.org/curated/en/138101493381025955/pdf/114650-IFC-Brief-Mercer-web-PUBLIC.pdf, p.2

[5] https://www.broadcom.com/company/corporate-responsibility/environment

[6] https://investyourvalues.org/retirement-plans/broadcom

[7] https://investyourvalues.org/retirement-plans/broadcom

[8] https://www.bloomberg.com/news/features/2022-10-20/how-to-purge-fossil-fuel-investments-from-your-401-k-or-ira#xj4y7vzkg

[9] https://www.asyousow.org/reports/the-impact-of-energy-sector-investments-on-the-financial-value-of-tech-401ks

[10] https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/MSInstituteforSustainableInvesting-SustainableInvestmentOptionsinRetirementPlans.pdf

[11] https://www.federalregister.gov/documents/2022/12/01/2022-25783/prudence-and-loyalty-in-selecting-plan-investments-and-exercising-shareholder-rights