Pension funds given misleading climate-risk advice

Oksana Patron

24 November 2023

The EDHEC-Risk Climate Impact Institute’s research has found the misleading nature of climate-risk advice given to pension funds and points to flawed use of models and a failure to communicate uncertainty.

The research has also indicated that markets and investors were underestimating potential climate damages.

Professor Riccardo Rebonato, scientific director of the EDHEC-Risk Climate Impact Institute,  has said that pension trustees had been poorly served by their consultants and the estimates of likely portfolio losses due to climate change in their authorities’ reports were ‘implausibly tame’.

His research further exposed the failure to communicate the huge uncertainty in damage estimates as the most glaring flaw of the advice received by trustees and denounced the non-sensical precision with which some of these estimates were presented.

Professor Rebonato warned that not only pension consultants but also financial markets appeared to be sleepwalking into the climate crisis, noting:

“Financial markets might be pricing in overly optimistic climate scenarios, indicating a potential repricing risk that trustees should be aware of,” he said.

His research offered a different and more nuanced perspective about why trustees had been poorly served by their consultants with regards to climate-risk advice.

He pointed to the DICE (the Dynamic Integrated Climate-Economy model), which were designed for policy design and had been inappropriately used for scenario analysis,

Also, their modularity, according to Rebonato, meant they could be modified to accommodate scenario analysis and there was a wide divergence of estimates by economists regarding the severity of climate damages, challenging the idea that groupthink has led to a tame consensus view.