Key Takeaways
- • Carbon Tracker and economist Prof. Steve Keen warn in a report released July 27, 2023 that pension funds are risking retirement savings of millions by relying on economic research that ignores climate tipping points.
- • The report finds many pension investment models predict 2 to 4.3°C of warming will have only minimal impact on member portfolios, based on economists' damage estimates that allow growth to continue even at 5 to 7°C.
- • A survey of 738 climate economics papers found the median prediction was that 3°C of warming would cut global GDP by just 5%, and 5°C by 10%.
- • Investment consultants Mercer, Aon Hewett and Hymans Robertson are named as relying on this research; Mercer advises LGPS Central, which manages £55bn for a million local government pension members.
- • The report warns of a "Climate Minsky moment" in which asset values could collapse abruptly once markets recognise the gap between economic forecasts and climate science.
Summary
A report released on 27 July 2023 by economist Prof. Steve Keen and the financial think tank Carbon Tracker argues that pension funds, financial institutions, central banks and regulators are underestimating the financial risks of climate change because they rely on economic research that excludes climate tipping points. Titled "Loading the DICE against pension funds," the report contends that this research is drawn from a small, self-referential group of climate economists who are typically peer-reviewed only by other economists. Keen, a Distinguished Research Fellow at University College London and former head of the School of Economics, History and Politics at Kingston University, draws a parallel with the failure of mainstream economists to foresee the 2008 financial crisis.
The report states that many pension funds use investment models that predict warming of 2 to 4.3°C will have minimal effects on member portfolios. It cites scientific warnings that tipping points, such as loss of winter ice in the Barents Sea and collapse of deep convection in the Labrador Sea, could be triggered within the next decade, and notes that a recent Institute and Faculty of Actuaries and University of Exeter report also highlighted their omission from economic models. A survey of 738 climate economics papers in top journals found the median expectation was that 3°C of warming would reduce global GDP by 5% and 5°C by 10%. Nobel laureate William Nordhaus is cited as predicting a 2% income reduction at 3°C and 7.9% at 6°C.
The report names several consultants and public bodies that it says rely on these assumptions. Mercer, advising Australian fund HESTA, projects a -17% portfolio impact by 2100 in a 4°C scenario, and its model does not account for tipping points. Mercer advises LGPS Central, which manages £55bn for a million Local Government Pension Scheme members in the UK; Shropshire County Pension Fund told members that a 4°C trajectory would reduce annual returns by only 0.06% in 2030 and 0.1% by 2050. Carbon Tracker's FOIA requests to more than 100 LGPS funds and pools found around 80% use investment consultants, with Mercer serving about 50% of the sector. The report also cites the Financial Stability Board, the NGFS and the IPCC as projecting limited economic losses at 3.5 to 4°C of warming.
Carbon Tracker founder Mark Campanale said pension schemes must send the market signals supporting a swift, orderly transition. Professor Tim Lenton of the University of Exeter called the paper "essential reading for asset owners." Make My Money Matter CEO Tony Burdon called the models "implausible" and "dangerous." The report warns of a possible "Climate Minsky moment" with an abrupt collapse in asset values, calls on regulators to revise climate stress tests, and states that pension funds have a fiduciary duty to correct their methodologies.
The report states that many pension funds use investment models that predict warming of 2 to 4.3°C will have minimal effects on member portfolios. It cites scientific warnings that tipping points, such as loss of winter ice in the Barents Sea and collapse of deep convection in the Labrador Sea, could be triggered within the next decade, and notes that a recent Institute and Faculty of Actuaries and University of Exeter report also highlighted their omission from economic models. A survey of 738 climate economics papers in top journals found the median expectation was that 3°C of warming would reduce global GDP by 5% and 5°C by 10%. Nobel laureate William Nordhaus is cited as predicting a 2% income reduction at 3°C and 7.9% at 6°C.
The report names several consultants and public bodies that it says rely on these assumptions. Mercer, advising Australian fund HESTA, projects a -17% portfolio impact by 2100 in a 4°C scenario, and its model does not account for tipping points. Mercer advises LGPS Central, which manages £55bn for a million Local Government Pension Scheme members in the UK; Shropshire County Pension Fund told members that a 4°C trajectory would reduce annual returns by only 0.06% in 2030 and 0.1% by 2050. Carbon Tracker's FOIA requests to more than 100 LGPS funds and pools found around 80% use investment consultants, with Mercer serving about 50% of the sector. The report also cites the Financial Stability Board, the NGFS and the IPCC as projecting limited economic losses at 3.5 to 4°C of warming.
Carbon Tracker founder Mark Campanale said pension schemes must send the market signals supporting a swift, orderly transition. Professor Tim Lenton of the University of Exeter called the paper "essential reading for asset owners." Make My Money Matter CEO Tony Burdon called the models "implausible" and "dangerous." The report warns of a possible "Climate Minsky moment" with an abrupt collapse in asset values, calls on regulators to revise climate stress tests, and states that pension funds have a fiduciary duty to correct their methodologies.
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