Official climate scenarios ‘increasingly seen as not decision-useful’, report claims
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Pension funds’ net-zero transition plans are “dramatically underestimating” the risks and opportunities presented by climate change, according to research.
In addition, official climate scenarios are increasingly regarded as not being ‘decision-useful’, a report by the Economics of Energy Innovation and System Transition project, led by the University of Exeter, revealed.
It said the Network for Greening the Financial System, a global collaboration between central banks and financial supervisors, has partnered with experts to develop hypothetical low-carbon transition scenarios out to 2050, each with different physical and transition risk profiles.
However, the report said that these ‘official’ scenarios are increasingly seen as not ‘decision-useful’.
“Time horizons are considered too long and they overlook key risks and opportunities the transition will bring,” it explained.
Jack Oliver, report co-author and senior programme manager at the University of Exeter, said current models assume that existing trends will continue gradually but warned climate “tipping points” could cause rapid transitions.
For example, historically valuable shares in fossil fuel companies could quickly lose value, and climate tipping points such as the dieback of the Amazon rainforest could dramatically alter human economies and societies, the research revealed.
Mike Clark, founder director at Ario Advisory, said: “Leading pension funds and other asset owners are moving well beyond the constraints of standard finance theory. Further, they are starting to recognise the weaknesses of the official climate scenarios which fail to meet their pressing needs.”
He added: “Many funds are now seeking to align their assets to a halving of greenhouse gas emissions before the decade is out. Official scenarios offer next to no guidance on how to achieve that.”
The report proposed 10 transition principles, which “provide a framework for transformational net-zero decision making and embedding the associated change in risk culture”.
Do pension funds need to take drastic measures to change to the way investment decision-making is framed?
