By Jeff McMahon
Index funds and the investors who own them face an unmanageable risk from climate change, according to the director of Stanford University’s Sustainable Finance Initiative. Many of those investors are pensions.
Alicia Seiger told members of the U.S. House Financial Services Committee last week that index investors are less able to manage climate risk because they’re less able to monitor it.
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Many pension funds join the New York State Retirement Common Fund (NYCRF) in preferring index funds because of their low cost. Low cost has helped index funds outperform managed funds since their inception in 1976. Broad diversification has also helped, but that’s where climate risk enters.
“Like most large pensions, to limit costs, NYCRF is heavily invested in passive index funds. In other words, they own the market, along with any mispriced risk or systemic failure.”
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