Pension funds and their investment consultants are depending on flawed research that lowballs the financial risk of climate change, according to a report released Thursday by Carbon Tracker.
A study done for the financial think tank by University of London research fellow Steve Keen places much of the blame on climate economists for perpetuating "scientifically false assumptions," according to the study report, Loading the Dice against Pensions.
Relying on flawed research leads to a disconnect between current investment decisions that assume relatively trivial impacts from climate change, and the likely effects of global warming that could include a sudden collapse in asset values, the report said.
"The economists are the weak link," Mr. Keen said in an interview. Pension funds and consultants "have all been fooled by the referees" whose peer review practices perpetuate the problem, he said. "Pension fund fiduciaries should be in shock after reading the report," Mr. Keen said.
He said that many pension funds use investment models that predict minimal impact on their portfolios even if global warming reaches 4.3 degrees Celsius, even while climate scientists warn of the existential threat to human civilization. Just as mainstream economists failed to predict the global financial crisis in 2008, the world could be headed toward an even bigger crisis, he warns.
"This is systemic. If we don't get this right, there will not be an economy," he said.
The study looked at Integrated Assessment Models and related literature that climate economists use to estimate the future economic damages of climate change. It compares those to the latest climate science and impacts that are not often included in the models, such as the impact on gross domestic product.
It also looked at local government pension funds and pools in England, Wales and Scotland to see how their management of climate risks, investment strategies and asset allocation decisions could be influenced by external investment consultants, who work with 80% of the pension funds involved.
"The advice pension schemes are receiving risks trivializing the potentially huge damage climate change will have to asset values," said Mark Campanale, founder and director of Carbon Tracker, in a statement on the study.