climate minsky moment
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Minsky moment: are pension assets at risk due to flawed climate analysis? | Netzeroinvestorhttps://www.netzeroinvestor.net/news-and-views/are-millions-of-pensions-at-risk-due-to-flawed-climate-analysisWidespread reliance on flawed research generates a disconnect between current investment decision making, which assumes relatively trivial impacts from climate change, and the likely real-world effects of global warming, Keen warned.
"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,” said Mark Campanale, the founder of Carbon Tracker.
“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,” he continued, adding that “the advice pension schemes are receiving risks trivialising the potentially huge damage climate change will have to asset values."
Campanale stressed that “these flawed climate risk models” are used throughout the financial system, lulling economic decision makers, from pension funds to central banks, into a false sense of security.
“The result is cavalier positions such as US Federal Reserve Board Governor Christopher Waller who announced: ‘Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States’,” he said.
The report issues a direct warning to asset owners for the serious prospect of an “unpleasant, abrupt and wealth destroying” so-called “Climate Minsky moment” with a sudden collapse in asset values as financial markets wake up to the gap between mainstream economist forecasts and the reality of climate impacts.
Keen, who is also the former head of the School of Economics, History and Politics at Kingston University, London, contrasts scientists’ empirical research with predictions by climate economists that are “a ‘hunch’ based on rather spurious assumptions for global warming, which have been used to generate equally spurious estimates of damages to future GDP.”
He underscored that global warming, at less than 1.5°C, is already affecting people and companies across the planet, pointing at record heatwaves, floods, and intensifying storms as they halt commerce, damage crops, create uninsurable areas, and impair infrastructure.
Keen singled out scientific research which finds that exceeding the 1.5°C Paris target would be “dangerous”, passing 3°C would be “catastrophic”, and reaching 5°C will be “beyond catastrophic, raising existential threats”.
Yet, despite scientific predictions, a survey of 738 climate economics papers in a number of top academic journals found the median prediction of economists was that 3°C of warming would reduce global GDP by just 5%, and warming of 5°C would see a 10% reduction.
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The researchers singled out investment managers and consultants such as Aon Hewitt, Hymans Robertson and Mercer as they "continue to rely on flawed research" when they advise pension funds on the impacts of global warming on members’ portfolios.
For example, Mercer, in advice to Australian fund HESTA predicts only a -17% portfolio impact by 2100 in a 4°C scenario. It states that its model primarily reflects coastal flood damage and does not take account of climate tipping points.
Mercer also advises LGPS Central, which manages £28.5 billion of retirement savings for a million members of Local Government Pension Schemes in the UK.
One of these schemes, Shropshire County Pension Fund, told members that a trajectory leading to 4°C by 2100 would only reduce annual returns by 0.06% in 2030 and 0.1% by 2050, saying that it relied on LGPS Central for information.
Moreover, in a 2022 report, Australian superannuation firm Unisuper concluded that even in a “worst case scenario” involving a 4.3°C increase in global temperatures by 2100, “the overall risk to our portfolio is acceptable.”
“Each layer in the process of assessing the risks of climate change has assumed that the previous layer has done its job adequately, and has relied on the previous layers reputation, rather than scrutiny of the work undertaken," explained Professor Keen.
“Pension funds rely upon consultants because of their reputation in the field; consultants rely upon academic economists, because their papers had passed academic refereeing,” he added.
“The final impact is a series of flawed economic assumptions informing pensions’ decision making.”