Global financial institutions forecast “implausible” and “dangerously…benign” economic impact from climate change
A recent study found that public and private financial institutions around the world don’t understand that the models they use to forecast the impact of climate change suffer a “striking disconnect from climate science” and, as a result, forecast “implausible” and “dangerously…benign” economic consequences of global warming.
The study by British actuaries found that financial services profoundly underestimate the risks of rising temperatures and tipping points that “trigger irreversible changes, such as the loss of the Amazon rainforest or the West Antarctic ice sheet.”
The study reports that global and national financial agencies specifically tasked with forecasting the economic impact of climate change are inadvertently misleading financial institutions – and the rest of the world.
Our economy may not exist at all if we do not mitigate climate change
“Economic models being used to underpin climate-change scenario analysis in financial services [have led] to the publication of implausible results in the Task Force on Climate-related Financial Disclosures (TCFD) reporting that show benign, or even positive, economic outcomes in a hot-house world,” Tim Lenton, Chair of Climate Change and Earth System Science at the University of Exeter, wrote in a Forward to the study. “This jars with climate science, which shows our economy may not exist at all if we do not mitigate climate change.” The TCFD was formed by the global Financial Stability Board “to improve and increase reporting of climate-related financial information.”
The study reported that these flawed models have resulted in unrealistically moderate forecasts from additional global agencies, as well, such as the Network for Greening The Financial System (NGFS), a group of 114 central banks and financial supervisors, the research concluded. The study was conducted by the Institute and Faculty of Actuaries (IFOA) and Exeter University’s Global Systems Institute. Actuaries use advanced math calculations to measure and manage risks.
The results emerging from the models are far too benign, even implausible.
Current financial models “exclude many of the most severe impacts we can expect from climate change, such as tipping points and second order impacts – they simply do not exist in the models. The consequence of this is that the results emerging from the models are far too benign, even implausible in some cases,” the study authors wrote in their introduction.
“It’s as if we are modeling the scenario of the Titanic hitting an iceberg but excluding from the impacts the possibility that the ship could sink, with two-thirds of the souls on board perishing,” the authors wrote. “The current scenarios…do not communicate the level of risk adequately. More dangerously, the artificially benign results can easily serve as an excuse for delaying action, as consumers of these results, such as policymakers and business leaders, may reasonably believe the results do adequately capture the risks.”
For example, the Network for Greening the Financial System estimated global gross domestic product loss in a “hot house” world with temperatures 3°C higher. But its estimate “does not include ‘impacts related to extreme weather, sea-level rise or wider societal impacts from migration or conflict’, all of which it estimates would act to further reduce global GDP,” the study reports.
“This may lead to herd mentality and ‘hiding behind’ Network for Greening the Financial System (NGFS) thinking, rather than developing an appropriate understanding of climate change,” the researchers wrote.
“Some models implausibly show the hot-house world to be economically positive, whereas others estimate a 65% GDP loss or a 50–60% downside to existing financial assets if climate change is not mitigated, stating these are likely to be conservative estimates.…”
“Some economists have predicted that damages from global warming will be as low as 2% of global economic production for a 3°C rise in global average surface temperature. Such low estimates of economic damages – combined with assumptions that human economic productivity will be…higher than today – contrast strongly with predictions made by scientists of significantly reduced human habitability from climate change,” Lenton wrote in the study introduction. By contrast, the study reported, other financial models estimate a massive “65% GDP loss or a 50–60% downside to existing financial assets if climate change is not mitigated,” the study reported.
The Paris Agreement commits countries to limit warming to 1.5°C by 2100. However, the UNFCCC last month reported that countries aren’t doing nearly enough to stop warming, and the UNEP said current policies will result in a 2.8°C rise.
Such low estimates of economic damages – combined with assumptions that human economic productivity will be…higher than today – contrast strongly with predictions made by scientists of significantly reduced human habitability from climate change
Scientists and economists have warned that basing economic forecasts on flawed climate change scenarios can compound the risks. At the recent Green Swan conference, John Hassler, professor of economics at Stockholm University, referenced a 2015 paper that implied Sweden would gain over 500% of GDP if global warming stood at 2.5°C at the end of the century, an implication that he said, “of course, makes absolutely no sense”.
A key problem with the economic models, the actuaries wrote, is the failure to recognize the impact of tipping points, “second order impacts” and “non-linear impacts” which could “trigger irreversible changes” such as deforestation, loss of rainforests and ice sheets, and involuntary mass migration, and “threaten the existence of human civilisations.”
While the IFOA/Exeter study reveals that the models financial institutions are using to forecast the economic impact of climate change scenarios are “dangerously benign,” support for it expressed by climate experts suggest it could lead to more accurate analysis – and safer planning.
Governments and consumers around the world are increasingly demanding that companies disclose and reduce their climate impact. European regulators early this year passed new rules requiring much more extensive environmental reporting. The U.S. SEC is expected to finalize similar rules this year, while Japan, the UK and other nations plan added requirements. And at least 140 nations have announced or are considering zero emission targets, which would cover almost 90% of the world’s emissions.
A growing number of companies, as a result, are adopting more science-based analysis techniques, such as Scope 1, 2, and 3 Emissions Reporting or Life Cycle Analysis. However, establishing cost-efficient, science-based risk analysis and emissions reporting methods that are consistent within industries, allowing for apples-to-apples comparison, and that are less vulnerable to greenwashing, remains a serious challenge.
The International Sustainability Standards Board (ISSB), for example, in June released new standards to help “improve trust and confidence in company disclosures about sustainability.” However, the ISSB reported that one of the several “market-led investor-focused reporting initiatives” it builds on is from the TCFD, whose economic impact forecasts the IFOA study found “implausible” because it showed “benign, or even positive, economic outcomes in a hot-house world.” The TCFD did not respond to an emailed request for comment on the IFOA study.
Scott Speer of Green Central Banking contributed to this report.