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Sunday Brunch: is failure on climate change really financially harmless ?
Sustainability, Strategy and Finance

Sunday Brunch: is failure on climate change really financially harmless ?

We talk a lot about climate models and how GHG emissions impact temperature, but not so much about climate damage function models. And yet this second set of models have a massive impact on financial decision making.

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. - The Emperors New Climate Scenarios 2023

We talk a lot about climate models and how GHG emissions impact temperature. But not so much about climate damage function models. These are the models that estimate how much financial damage climate change could cause. Putting it bluntly, the economic climate damage function models have a much greater impact on the behaviour of the financial and economic community than climate science does.

According to a recent report from the Institute and Faculty of Actuaries, the climate damage function models most organisations use are based on erroneous assumptions. As a result, the models say - global warming will have only a insignificant impact on our economic output. Such a conclusion fails the common sense test. The real financial outcome is likely to be materially worse.

And yet, many in the financial community continue to be influenced more by the climate damage function models than the climate science. This is not something we can ignore - we cannot assume that logic will prevail.

This is not me saying this. It's the Institute and Faculty of Actuaries - the financial risk specialists. If you have ever worked with actuaries, and I am guessing most non finance people have not, they are not given to flights of emotion. They are very rational people. A recent report from the Institute, together with the University of Exeter, entitled The Emperor's New Climate Scenarios, quietly takes apart the notion that the financial risk from climate change is minimal.

I strongly recommend all Sustainability Professionals who are involved with the finance industry read this report. And then, spread the word. It's not an easy read, it assumes we understand some of the basic concepts around financial risk. But its worth the effort. And it could lead to us rethinking what we mean by sustainable investing and fiduciary duty.


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Is failure on climate change really financially harmless ?

Before you stop reading this, assuming that this is just nonsense, stick with me for a while. Because many financial institutions believe that it is, or apparently believe this. And they are undertaking investment and strategy actions on that basis.

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