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Carbon Tracker: Financial firms' 'flawed' climate models putting millions of pensions at risk

A think tank has cautioned financial establishments that depend on economic analysis that does not consider crucial scientific data regarding the financial impacts of climate change.

A new report has cautioned that the retirement investments of millions of people could be in jeopardy because pension funds have persisted in using "imperfect" climate economics.

Carbon Tracker, a highly respected think tank, has today released a report warning that the hazards and financial losses posed by climate change are under-evaluated by financial entities, banks, regulators, and governments. The report, entitled "Loading the Dice Against Pensions," is available here.

The authors of the report caution that instead of relying on research from a select few climate economists who don't consider the grave effects of climate change, a more comprehensive approach should be taken.

According to Carbon Tracker, pension funds often rely on investment models that anticipate a minimal effect on member portfolios in the event of global warming between 2-4.3°C. These models are based on "flawed" estimates of the damage of climate change that predict that even with 5 to 7°C of global warming, economic growth will remain intact, it states.

According to Mercer, a consultant on investments, a 4 °C rise in global warming by 2100 would have a 17% impact on investment portfolios. However, as Carbon Tracker has pointed out, this estimation does not reflect the potential coastal flood damage or other climate tipping points that may be triggered as temperatures rise in the coming years. Experts concur that such a high-temperature rise would be damaging to human society.

The report indicates that these economic estimations contradict the scientific agreement, which suggests that this degree of global warming would be "a fatal hazard to human society".

Even though the gravity of the danger highlighted by climate scientists has not been reflected in evaluating most of the conventional investment models employed by financial organizations, the warning alerts of this.

For a long time, people have been cautioning that the financial markets are not accounting for the magnitude of the economic danger of a growing climate crisis. A study by the Institute and Faculty of Actuaries in collaboration with the University of Exeter recently noted that it was "alarming" how frequently many faulty economic models are used to ev climate change scenarios in the financial sector.

Professor Tim Lenton, chair in climate change and earth system science at the University of Exeter, remarked on Carbon Tracker's discoveries, noting that numerous economic models employed by the financial sector "contrast sharply with climate science, demonstrating that our economy may not continue to exist if we do not take action to slow climate change."

He further emphasized the importance of banks and regulatory bodies comprehending the boundaries of these models and advancing towards realistic climate situations that consider the potentially disastrous outcome of an overheated planet.

The Carbon Tracker has noted that incorrect assumptions regarding climate economics persist because these studies are mainly reviewed by other economists and thus lack a scientific perspective.

The consequence of this common use of defective research is a "gigantic rift" between the current investment decision-making, which assumes minor impacts of climate change, and the potential valid results of global warming, the document added.

Central pension funds and banks have been led to a misguided sense of security regarding economic decisions. This may lead to an unfortunate, sudden and wealth-depleting drop in asset values if the discrepancy between economists' forecasts and the actual climate crisis is not addressed. That is what the report warns.

Professor Steve Keen, the primary writer of the report, declared: "Rather than a minor cost-benefit issue that will principally affect the coming generations, as the economic literature maintains, global warming is a potentially catastrophic danger to the economy, one that could materialize during the lifetime of pensioners still living today. We are talking about the financial security of millions of persons."

According to the report, scientific research has determined that surpassing the 1.5°C climate goal of the Paris Agreement would be "dangerous", surpassing 3°C would be "catastrophic", and if we reach 5°C, it will be "beyond catastrophic", posing an existential menace.

Despite the solid scientific agreement that global warming is a significant danger, a 2021 survey of 738 climate economics papers from top academic journals revealed that economists forecast that a temperature increase of 3°C would result in a 5% decrease in global GDP, and a 5°C rise would trigger a 10% fall.

The research concluded that "the majority" of economists have not adjusted their reports to fit with climate science. Consequently, many investment advisors and consultants still depend on inadequate research when they give pension funds guidance about how global warming will affect their members' investments.

Mark Campanale, the creator of Carbon Tracker, emphasized the importance of pension funds sending suitable investment signals to transition to an energy system that is secure from climate risks.

It was stated that making a prompt and efficient switch is advantageous for all involved, especially those who benefit from the scheme. Nevertheless, there is a disparity between economics, climate science, and assessing financial risks; as the report suggests, the counsel that pension schemes get might not be enough to recognize the massive harm climate change could bring to assets.


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