Financial Models on Climate Risk 'Implausible,' Say Actuaries

Financial institutions often did not understand the models they were using to predict the economic cost of climate change and were underestimating the risks of temperature rises, research led by a professional body of actuaries shows. From a report: Many of the results emerging from the models were "implausible," with a serious "disconnect" between climate scientists, economists, the people building the models and the financial institutions using them, a report by the Institute and Faculty of Actuaries and the University of Exeter finds. Companies are increasingly required to report on the climate-related risks they face, using mathematical models to estimate how resilient their assets and businesses might be at different levels of warming. The International Sustainability Standards Board last week launched long-awaited guidance for companies to inform investors about sustainability-related risks, including the climate scenarios chosen in their calculations. Countries including the UK and Japan have said they plan to integrate these standards into their reporting rules. Companies will also have to report the full scope of their emissions, including those from their supply chains, from the second year they begin to report under the guidelines due to come into effect in 2024. That was a particular "challenge," since companies would need to collect the data from all their suppliers, said George Richards, head of ESG reporting and assurance at KPMG. [...] Some models were likely to have "limited use as they do not adequately communicate the level of risk we are likely to face if we fail to decarbonise quickly enough," the paper released on Tuesday said.

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