Research raises concerns over 'flawed' climate analysis used by pension schemes

Pension schemes could be risking the retirement savings of millions by relying on research that ignores scientific evidence about the financial risks embedded within a warming climate, a report from think tank Carbon Tracker has said.

The report, produced in partnership with Professor Steve Keen, warned that financial institutions, central banks, regulators and governments underestimate the dangers and economic damages of climate change, relying on research from a "small, self-referential group" of economists that ignores the impact of climate tipping points.

In particular, the report found that many pension schemes use investment models that predict global warming of 2 to 4.3°C will have only a minimal impact on member portfolios, relying on estimates that predict that even with 5 to 7°C of global warming economic growth will continue.

However, Carbon Tracker argued that such economic studies cannot be reconciled with warnings from climate scientists that global warming on this scale would be “an existential threat to human civilisation.”

The report, Loading the DICE against pension funds, also argued that these are “scientifically false assumptions”, as their studies fail to consider the likelihood of predicted triggering “tipping points” that accelerate economic damage.

Indeed, author of the report, Professor Keen, emphasised that global warming, at less than 1.5°C, is already affecting people and companies across the planet, warning that record heatwaves, floods, and intensifying storms halt commerce, damage crops, create uninsurable areas, and impair infrastructure, among other harms.

Given this, the report argued that there is a "huge disconnect" between current investment decision making, which assumes relatively trivial impacts from climate change, and the likely real-world effects of global warming.

The report stated: “These predictions of the minimal economic impact of global warming of 2 - 4.3°C are representative of the advice being given by pension funds worldwide to their members.

"This report is a call to all stakeholders, from governments, regulators, investment professionals, all the way to civil society groups and individuals, to ensure that the critical error of taking this unsound (economic) research seriously is reversed, before it is too late.

"Climate change policy should be based upon the work of scientists, rather than the small group of economists who have worked on climate change, and “must be treated as a potentially an existential threat, rather than an issue which is suitably addressed by economic cost-benefit analysis.”

Adding to this, Carbon Tracker founder and director, Mark Campanale, stated: "To ensure that the world moves into a new climate secure energy system, it’s 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.”

Make My Money Matter CEO, Tony Burdon, also highlighted the findings of report as demonstration that the climate models used by pension schemes "are not only implausible - they're dangerous too".

"This so called ‘expert advice’ is underpinning the investments of millions of UK savers, yet is jeopardising both our pensions and the planet," he continued.

"When temperatures on Earth last rose 5 degrees, 95 per cent of living species were wiped out, and sea levels rose 20 meters. Yet these models suggest the impacts of such temperature rises on GDP - and our pensions - will be minimal.

"These predictions are flawed, complacent and dangerous. Pension funds have a fiduciary duty to urgently act on this report, and take immediate steps to protect both our pensions, and the planet."

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