“Better to be roughly right than precisely wrong”: IoFA issues warning against mainstream climate models
New analysis from the UK’s Institute and Faculty of Actuaries and University of Exeter shows global warming is accelerating faster than expected, with models lagging behind
Research published by Institute and Faculty of Actuaries (IoFA) and scientists from the University of Exeter suggests global warming is accelerating faster than predicted. The consequence, researchers warn, is a significant underestimation of climate risk by financial institutions.
The ‘Parasol Lost’ report, finds a much faster rate of warming than conventional forecasts might suggest. Physical risks, for instance, are already intensifying. The contributing factors – according to the report – include increased sensitivity to GHG emissions and a worrying loss of aerosol cooling.
“Today, we can already observe the economic cost of these climate impacts; in the US alone, billion-dollar climate disasters now take place every 19 days, compared to every 82 days in the 1980s”, says Dr. Jesse Abrams, one of the report’s authors and a scientist at the University of Exeter.
“As the rate of warming accelerates, these climate shocks are now likely to arrive faster, bringing more immediate and intense impacts to our economies that policymakers and markets must be prepared for”, Abrams notes.
The findings show that if current levels of warming are left untreated, major disruptions and catastrophic losses could exacerbate financial instability. In a bid to attract attention from financial institutions, the authors have deliberately framed this as ‘planetary insolvency’.
Risky business
The report’s key message to financial institutions is that they have thus far underestimated the financial consequences of climate change.
“An actuarial review of key climate change assumptions shows we may have seriously underestimated the rate of warming as well as the related economic impacts”, said Sandy Trust, the report’s lead author and member of the IoFA’s sustainability board.
Trust, who is director of sustainability risk at asset manager Baillie Gifford believes this pattern of imperfect risk modelling and complacency has historical precedent in the 2007 financial crisis.
The report draws a parallel between today’s risk modelling and the practices leading up to 2007, when “high levels of complacency and low levels of risk understanding” were prevalent.
“The parallels between the risk management failure of the global financial crisis and inaction on the major systemic risk posed by climate change are clear. Both feature an over reliance on benign risk model results and a failure to understand systemic risk”, he commented.
Speaking at a media briefing for the report’s launch, Trust said financial institutions must pay heed to new evidence. “It is better to be roughly right than precisely wrong”, he warned.
