Understanding the Underestimation of Climate Change Risks by Financial Institutions
Inadequate Understanding of Climate Change Risks
Financial institutions have often lacked a comprehensive understanding of the models they use to predict the economic cost of climate change, leading to the underestimation of risks associated with rising temperatures. A professional body of actuaries conducted research that revealed a significant “disconnect” between climate scientists, economists, model builders, and the financial institutions utilizing these models.
According to a report by the Institute and Faculty of Actuaries and the University of Exeter, many of the results generated by these models were deemed “implausible.” This discrepancy highlights the urgent need for financial institutions to enhance their understanding of climate change risks to ensure more accurate predictions.
The Importance of Mathematical Models in Assessing Climate-Related Risks
In today’s world, companies are increasingly mandated to report on the climate-related risks they face. They utilize mathematical models to estimate the resilience of their assets and operations under different warming scenarios. However, the research conducted by the professional body of actuaries suggests that these models may be inadequate in accurately communicating the level of risk associated with climate change.
The International Sustainability Standards Board recently launched a guide for companies to inform investors about sustainability-related risks, including the climate scenarios used in their calculations. Countries like the UK and Japan are considering integrating these standards into their reporting rules to provide more comprehensive and transparent information to stakeholders.
The Complex Challenge of Emissions Reporting
As part of their reporting obligations, companies will soon be required to disclose the full extent of their emissions, including those from their supply chains. This poses a challenge as it necessitates data collection from all of their suppliers. Entities like KPMG have acknowledged the difficulty inherent in this undertaking.
In California, legislators are expected to vote on a bill that would compel large companies operating within the state to report their emissions fully. This move towards greater transparency aims to hold corporations accountable for their environmental impact.
The Limitations of Current Models
The research conducted by the professional body of actuaries discovered several limitations in the models used by financial institutions to estimate climate change risks. Some economists had predicted “relatively little economic damage” from high levels of warming, while large UK financial institutions suggested they would fare just as well or better under a greenhouse scenario compared to more moderate warming scenarios.
These findings are concerning as they indicate the potential dismissal of significant risks associated with climate change. Passing climatic “tipping points” and their irreversible negative consequences are often not captured by the models, emphasizing the need for more comprehensive and accurate assessments.
Expanding Perspectives: Unveiling Unique Insights into Climate Change Risks
While the research sheds light on the underestimation of climate change risks by financial institutions, it is essential to delve deeper into the subject matter to enhance understanding. Incorporating unique perspectives and insights can captivate readers and provide a more comprehensive exploration of the topic.
One key aspect to consider is the long-term economic impact of climate change. While some models may downplay the severity of the risks, studies and projections from reputable organizations suggest that the economic consequences could be staggering. Citing statistics from reports by the United Nations body of scientists could further emphasize the urgency of combating climate change.
Furthermore, it is crucial to analyze the interconnectedness of various factors affected by climate change. Extreme weather events, sea level rise, and social impacts like migration or conflict can have far-reaching consequences for economies and societies. Highlighting these interconnected factors and their potential implications on financial institutions can provide a more holistic perspective on climate change risks.
The Call for Improved Transparency and Reporting
The push for greater transparency in emissions reporting highlights the growing recognition of the need to accurately assess climate change risks and communicate them effectively to stakeholders. By requiring companies to disclose the full extent of their emissions, including those from their supply chains, regulators aim to drive more responsible practices and facilitate informed decision-making.
Moreover, initiatives like the International Sustainability Standards Board’s guide demonstrate the commitment towards comprehensive reporting standards. By integrating these standards into reporting rules, countries can ensure consistent and reliable information that meets the needs of investors and other stakeholders.
Conclusion
The research conducted by the professional body of actuaries and the University of Exeter highlights the underestimation of climate change risks by financial institutions. Inadequate understanding of the models used, combined with the omission of significant factors, has led to a serious disconnect between scientists, economists, model builders, and financial institutions.
Recognizing these shortcomings, it is imperative for financial institutions to enhance their understanding of climate change risks. By improving the accuracy of predictions and incorporating comprehensive assessments of interconnected factors, financial institutions can better inform stakeholders and mitigate the economic and societal consequences of climate change.
Summary
Financial institutions have often underestimated the risks of climate change due to a lack of understanding of the models used to predict economic costs. These models have yielded “implausible” results, highlighting the disconnect between various stakeholders involved in climate change assessment. To address this issue, greater transparency and reporting, including the disclosure of emissions from supply chains, are being implemented. However, current models have limitations that need to be addressed. By providing unique insights into climate change risks and emphasizing the economic impact and interconnectedness of various factors, stakeholders can gain a more comprehensive understanding of the challenges at hand.
—————————————————-
| Article | Link |
|---|---|
| UK Artful Impressions | Premiere Etsy Store |
| Sponsored Content | View |
| 90’s Rock Band Review | View |
| Ted Lasso’s MacBook Guide | View |
| Nature’s Secret to More Energy | View |
| Ancient Recipe for Weight Loss | View |
| MacBook Air i3 vs i5 | View |
| You Need a VPN in 2023 – Liberty Shield | View |
Receive free updates on the global economy
We will send you a myFT Daily Digest email rounding last global economy news every morning.
Financial institutions often did not understand the models they were using to predict the economic cost of climate change and were underestimating the risks of rising temperatures, according to research conducted by a professional body of actuaries.
Many of the results that emerged from the models were ‘implausible’, with a serious ‘disconnect’ between them climate scientists, economists, the people who build the models and the financial institutions that use them, according to a report by the Institute and Faculty of Actuaries and the University of Exeter.
Companies are increasingly required to report on the climate-related risks they face, using mathematical models to estimate how resilient their assets and operations might be under different levels of warming.
Last week, the International Sustainability Standards Board launched a long-awaited guide for companies to inform investors about sustainability-related risks, including the climate scenarios chosen in their calculations.
Countries including the UK and Japan have said they want to integrate these standards into their reporting rules.
Companies will also be required to report the full extent of their emissions, including those from their supply chains, beginning in the second year they begin reporting under guidelines that go into effect in 2024.
This was a particular “challenge,” since companies would have to collect data from all of their suppliers, said George Richards, head of ESG reporting and assurance at KPMG.
In California, lawmakers are expected to vote in the coming months on a bill that would require large companies operating in the state to report the full extent of their emissions.
Some models are likely to have “limited use as they do not adequately communicate the level of risk we could face if we fail to decarbonise quickly enough,” the paper released Tuesday said.
He also found that significant factors were sometimes missing from the models.
For example, an assessment of the global loss of gross domestic product in a so-called “greenhouse” world with temperatures above 3°C by a group of 114 central banks and financial supervisors, known as the Network for Greening the Financial System, did not include “impacts related to extreme weather, sea level rise or wider social impacts due to migration or conflict”.
As a result of such overly “benevolent” models, large financial institutions had reportedly faced minimal economic impacts if the world warmed more than 1.5C above pre-industrial levels, he said.
The Paris Agreement commits countries to efforts to limit warming to 1.5°C by 2100, even as policies in place now put the world on track for an increase of between 2.4C and 2.6Csay the United Nations body of scientists.
In reports by the Climate Financial Information Task Force, several large UK financial institutions had reported that they would fare just as well or better economically under a greenhouse scenario than more moderate warming scenarios, the researchers found, without name institutions.
Some economists had even predicted “relatively little economic damage” from high levels of warming, said Tim Lenton, co-author of the report who holds the climate change chair at Exeter.
It was “worrying” to see those models used by financial institutions to estimate their risks, Lenton said.
The consequences of passing climatic ‘tipping points’ — self-reinforcing and irreversible negative planetary changes — were often not captured by the models, the researchers said.
Financial institutions often did not understand the assumptions contained in the models and their limitations, they added.
Climate capital
Where climate change meets business, markets and politics. Explore the coverage of the FT here.
Are you curious about the FT’s environmental sustainability commitments? Learn more about our scientific goals here
—————————————————-