The Actuary 29/11/2023
"Climate risk advice to pension funds is often misleading, uses flawed models and fails to communicate future uncertainty, according to recent research.
An EDHEC-Risk Climate Impact Institute position paper, Portfolio Losses from Climate Damages, has warned that markets and investors are underestimating potential climate damages.
It pointed to reporting by UK Local Government Pension Scheme authorities on their governance and management of climate risks. Drawing on investment consultants’ advice, reports have included simulations of climate impacts on investments that suggest portfolios would be marginally impacted – even in high temperatures.
The paper, written by the institute’s scientific director Riccardo Rebonato, argued that pension trustees have been “poorly served” by consultants, meaning their estimates of portfolio losses due to climate change are “implausibly tame”.
It said the most glaring flaw in the advice was “the failure to communicate the huge uncertainty in damage estimates”, and further denounced the “nonsensical” precision of some estimates..
Climate scenarios should include “approximate probabilities” to prevent pension consultants and financial markets from “sleepwalking into the climate crisis”, the paper added."
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