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#LCAW2022: Cash flow modelling and climate change: a closer look

Celebrating London Climate Action Week, this article features as part of IFA Magazine’s editorial campaign throughout this week, which aims to highlight key issues, news and views in the field of climate action.

Written by Louisiana Salge, Senior Sustainability Specialist

London Climate Action Week (25th June – 3rd July) is the annual event bringing together world-leading climate professionals to find practical solutions to climate change. Louisiana Salge, Senior Sustainability Specialist at EQ Investors takes a closer look at how climate change will likely influence your clients’ future financial decisions.

As financial planners, you are tasked with helping your clients plan for the many elements that erode their wealth, such as inflation, longevity, taxes, and health care. Unfortunately, many haven’t given climate change a second thought. Let me talk you through four assumptions in cashflow modelling that are likely to be impacted by climate change.

Higher costs

First comes assumptions around inflation. Climate change itself will put pressure on raw materials, as will our response to the crisis: higher demand for low carbon technology, quick spending to meet targets, skilled individual shortage etc. This all creates significant inflationary pressure, which may not be captured by your current long-term view.

Investment returns

Next is the assumptions about stable global growth rates and expected returns from investments given a risk profile. Climate change is likely to dramatically shift risks and opportunities across the world, including making big pockets of the economy lose competitiveness and permanent value through stranded fossil fuel assets or high-polluting business models.

Mainstream investment following market benchmarks does not appear to be pricing in these risks or opportunities correctly and this is unlikely to be in the client’s long-term benefit.

Physical risks to property

We are already witnessing the impacts of climate change in more frequent extreme weather conditions, flooding, and fires. In this new world, clients’ property value may also need to be assessed against these physical impacts of climate change and depending on location, your cash flow modelling may need to integrate rising insurance costs for example or in more extreme cases the need for a new home.

Health effects

Lastly, if we surpass our climate targets significantly, there will be a shock to all systems, and the physical risks to your client’s health may fully undermine “life planning” as we know it now. Passing wealth onto the next generation, while often a key aim, will be a challenge if there is no world to pass it into.

Thinking ahead

For these reasons, 21st-century financial blueprints should include provisions for climate change. There are ways you can start act to prepare now. Savvy planners will incorporate any additional climate-related cost-of-living spikes into their cash flow forecasting and help clients find ways to safeguard their wealth. When it comes to investments, establish whether all your investment managers are integrating climate related risks and opportunities into their decision making and portfolio management. Climate change will impact us all and may afford opportunities for forward-thinking planners to set themselves apart.

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