Climate modelling ‘not fit for purpose’
At Net Zero Investor’s DC Forum investors discussed why they lack faith in current climate modelling and the way forward
Climate scenario analysis is often “problematic”, “useless” and “not fit for purpose”, investors were told at Net Zero Investor’s defined contribution (DC) forum at the London Stock Exchange.
Speakers outlined how climate scenario modelling has not been in investors’ good books lately with some models assuming that catastrophic climate forecasts would have little to no impact on investment returns.
Talking to delegates, Natalie Winterfrost, director at LawDebenture, stated that as a trustee most models presented to her don’t incorporate tipping points, with a lot of modelling showing “benign” climate impact.
“We are spending a lot of money on scenario analysis, which is not actually driving anything useful. But it actually goes further than that to potentially being harmful.
“As a trustee board we are pushing to discuss climate issues and other environmental, social and governance (ESG) issues, while we are getting numbers that suggest to co-trustees that it’s not really the biggest risk,” Winterfrost told delegates.
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‘Not fit for purpose’
Adding to Winterfrost’s points, Simon Perham, head of investor outreach Europe at Carbon Tracker, highlighted that the damage equation models are “not fit for purpose” for several reasons, including GDP assumption, data fabrication and lack of understanding of the consequences of climate change outside of temperature increases.
Perham’s comments come on the back off recent research by Carbon Tracker, called ‘Loading the DICE Against Pensions’, which revealed that Local Government Pension Scheme funds use investment models that predict global warming of 2 to 4.3°C will have only minimal impact on member portfolios.
“Professor [Steve] Keen once described our economic modelling or the way that we approach climate change as like Winston Churchill saying, ‘We'll fight them on the beaches only as long as it's economically prudent to do so’.
“The level of which these damage equations, where they got to in our society, where they've got to in our financial system and the absurd assumptions now that were revolutionary many years ago are just simply now not fit for purpose,” Perham suggested.
Also echoing these points was Marian D’Auria, global head of risk and sustainability at Liberty Steel Group and board member at USS, who added that modelling has “been problematic since modelling began”.
However, she pointed out that the current knowledge investors have on modelling enables them to approach scenario analysis “with a bit more scepticism”, which “gives us the opportunity to think about this more holistically to make better decisions”.
D’Auria highlighted that USS has been doing further research on modelling to make it “more useful for those who are being tasked with making decisions”. “We are taking a more qualitative and narrative approach, where you look at translating some of these climate inputs into the geopolitical and economic outputs that might exist. Thinking about what the world could look like if we follow the same path,” she stated.