Pension funds are placing too much reliance on a group of “self-referential” economic advisers rather than seeking out the lates scientific advice on climate change, putting investors’ money at risk, according to report.
A report from think tank Carbon Tracker criticising pension funds and their advisers for underestimating likely impacts from future climate change on their investment portfolios is the latest salvo from environmental organisations claiming investment consultants and accountants are falling short when advising their clients on climate-related risk.
The report, Loading the DICE Against Pension Funds, argues that many pension funds develop investment models based on advice from a handful of investment managers and consultants that drastically underestimate the negative impact global warming could have on businesses in their portfolios in the near future.
The report said around 80% of UK local government pension scheme funds use investment consultants, who, it contends, often do not use the latest scientific evidence to inform their economic models.
Financial institutions, central banks, regulators and governments underestimate the dangers and economic damages of climate change and the resulting impact on asset prices, because they rely on research from “a small, self-referential group of climate economists that ignores the impact of climate tipping points”, according to the report.
Tipping points are moments in time when a number of series of smaller events or trends combine to trigger a much bigger change, whose timing is often hard to predict, if it is foreseen at all. One possible climate-linked example would be a potential alteration of the conveyor belt of Atlantic currents that carry warm water northwards from the tropics, which a July report from researchers at the University of Copenhagen said could happen in coming decades with consequences for weather patterns – and businesses – around the world.
Other processes that could lead to tipping points include, among others, the loss of summer sea ice in the Arctic, the release of carbon from thawing permafrost, changing Asian monsoon patterns and shrinkage of the Amazon rainforest.
“Global warming is not a minor cost-benefit problem that will mainly affect future generations, as the economic literature asserts, but a potentially existential threat to the economy, on a timescale that could occur within the lifespan of pensioners alive today,” according to the report’s author, economist professor Steve Keen, a distinguished research fellow at University College of London. Keen was formerly the head of the School of Economics, History and Politics at Kingston University, London.
The report notes that a survey of 738 climate economics papers in leading academic journals found the median prediction of economists was that 3°C of warming would reduce global GDP by 5%, and warming of 5°C would see a 10% reduction. These figures were overly optimistic when compared with scientific assessments of the dangerous or catastrophic impacts that such temperature rises were likely to have on the planet, it said.
Fiduciary duty
Carbon Tracker said pensions scheme providers had “a fiduciary duty to correct the erroneous predictions they have given their members”. It said they should obtain second opinions on the likely scope of economic damages resulting from climate change directly from scientists rather than relying solely on economists, ensure training on climate risk includes the latest findings of climate scientists as well as economists, and make consultants’ climate risk assessments available publicly to allow wider scrutiny.
“Companies, regulators and investors now need to implement transition, and stop just talking about it, as the risks of failing to act grow exponentially,” Harry Benham, a senior advisor to Carbon Tracker said in a blog.
The report is published at a time when some major financial institutions are being criticised for softening earlier pledges to adopt investment strategies to speed up the energy transition, in part due short-term economic concerns triggered by energy security uncertainties and rising prices largely related to the Ukraine war.
Previous research has also highlighted similar dangers, including a 2021 paper from Boston University’s School of Law, which concluded that under-pricing of corporate climate risk was leading to misallocation of investment capital.
On a related topic, in May, Client Earth wrote to the body representing the world’s largest accounting companies to express its concerns that auditors did not fully consider climate-related matters when preparing financial statements or audits, or did not explain how they had done so, if they did. The criticism was contained in a letter from the environmental NGO to the Global Public Policy Committee — a group made up of senior leaders from PwC, Deloitte, KPMG, EY, BDO and Grant Thornton. Client Earth said recently it had received no response to the letter.
