‘Flawed’ climate analysis driving investment decisions of banks and pension funds

Financial institutions, central banks, regulators and governments are underestimating the economic damages that the climate crisis will cause, with new research warning that economists are currently modelling future markets on “flawed” data that fails to account for climate tipping points.

‘Flawed’ climate analysis driving investment decisions of banks and pension funds

The research warns of “flawed” economic studies and “scientifically false assumptions” by climate economists that are still driving investment forecasts

New research from Carbon Tracker warns that widespread reliance on “flawed research” means that investment decisions today are ignoring the economic and physical effects of a changing climate. As a result, pension funds are risking the retirement savings of millions of people.

The research found that many pension funds use investment models that predict global warming of 2C to 4.3C will have minimal impact on GDP and portfolios. Indeed, some institutions are using modelling that claims that even a 7C rise in average temperatures would see economic growth continue. Carbon Tracker argues this will not be the case.

Economist Prof. Steve Keen, a Distinguished Research Fellow at the University College of London, who authored the research, warns that just as economists failed to predict the financial crisis in 2008, they are now ignoring another impending crash, this time delivered by the climate crisis.

“Global warming is not a minor cost-benefit problem that will mainly affect future generations,  as the economic literature asserts, but a potentially existential threat to the economy, on a timescale that could occur within the lifespan of pensioners alive today,” Keen states. “We are talking about the financial futures of millions of people.”

The research warns of “flawed” economic studies and “scientifically false assumptions” by climate economists that are still driving investment forecasts. It claims that of 738 climate economics papers in top academic journals, the median prediction was that 3C of warning would reduce global GDP by 5%, while 5C would see a 10% reduction.

The Financial Stability Board (FSB), for example, predicts that a 4C rise in global temperatures would reduce global asset prices by 3-10%.

However, increased and more severe heatwaves, floods, and intensifying storms continue to damage crops, create uninsurable areas, and impair infrastructure, Carbon Tracker notes. The report quotes scientific research which finds that exceeding the 1.5C Paris target would be “dangerous”, passing 3C would be “catastrophic”, and reaching 5C will be “beyond catastrophic, raising existential threats”.

It also warns that various tipping points, such as the loss of winter ice in the Barents Sea and the collapse of deep convection in the Labrador Sea, could create more extreme seasonal weather and that these are not taken into account in economic studies.

Carbon Tracker’s founder Mark Campanale said: “To ensure that the world moves into a new climate secure energy system, crucial pension schemes send the market the right investment signals. The signal has to be that a swift, orderly transition is in everyone’s financial interests, particularly for scheme beneficiaries.

“However, the relationship between economics, climate science and assessing financial risk is not a comfortable one: as this report demonstrates, the advice pension schemes are receiving risks trivialising the potentially huge damage climate change will have to asset values.”

Pension pressure points

Currently, UK-based pension schemes have more than £88bn invested in fossil fuel firms, the equivalent of £3,000 per pension policyholder. That is according to Make My Money Matter, which analysed the fossil fuel investments of more than 50 of the nation’s largest pension schemes.

Issues aren’t just isolation to energy and carbon. Just one-fifth of pension funds and providers taking part in the world’s largest net-zero business collaborations have comprehensive plans to tackle deforestation, campaigners claim.

Research analysing the deforestation-related policies and commitments of 77 pension funds and providers that participate in the UN-backed Race to Zero campaign and/or the Glasgow Financial Alliance on Net-Zero (GFANZ).

The conclusion is that just 19% of these funds have comprehensive plans to tackle deforestation, both at a top-line level and in regard to specific forest risk commodities such as soy, palm oil, leather, beef and timber.

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