A report out today accuses pension funds of using flawed climate economic data and predictions about the financial impact of global heating that are far too mild.

Financial think tank Carbon Tracker and Steve Keen, professor at University College London, have published a report entitled ‘Loading the DICE against pension funds – Flawed economic thinking on climate has put your pension at risk’.

In the report, the authors say investment consultant Mercer – which advises pension schemes including the UK’s local government pensions manager LGPS Central – has estimated that global economic damages from a 3°C global warming trajectory would be just 0.5% of GDP in 2050.

Asked whether this assertion was correct, Mercer told IPE it welcomed input on its climate change work, and that it also contributed to third-party reports “to help increase awareness and understanding of how climate change may affect investments and in particular, pensions”.

However, the consultancy added: “We are disappointed that Carbon Tracker’s report presents an incomplete, and therefore misleading, summary of Mercer’s climate change analysis.”

Mercer said the report analysis focused on older versions of Mercer’s climate change model.

“Climate scenario models evolve as more information about climate change and global warming becomes available,” the firm said.

“They include an element of qualitative judgment, and are just one input investors should consider to manage the risks and opportunities of climate change in their portfolios.

“As Carbon Tracker acknowledge, Mercer has developed a new model in collaboration with Ortec Finance,” the consultancy said, adding: “This model reflects our current point of view and produces scenarios with different impacts than those cited in the report”.

The Carbon Tracker report also said Shropshire County Pension Fund had told members that a climate heating trajectory leading to 4°C by 2100 would only reduce annual returns by 0.1% by 2050.

IPE has contacted Shropshire County Pension Fund as well as LGPS Central for comment.

In a 2022 report, the authors of the report said, Australian superannuation firm UniSuper concluded that even in a worst-case scenario involving a 4.3°C increase in global temperatures by 2100, “the overall risk to our portfolio is acceptable”.

Keen said: “Global warming is not a minor cost-benefit problem that will mainly affect future generations, as the economic literature asserts, but a potentially existential threat to the economy, on a timescale that could occur within the lifespan of pensioners alive today.”

According to the report, “scientifically false assumptions” by climate economists persist because their studies are typically peer-reviewed only by other economists, and fail to incorporate key science.

That practice ignores the likelihood of predicted triggering of “tipping points” that accelerate economic damage, they say.

Mark Campanale, founder and director of Carbon Tracker, said that to ensure the world moved into a new climate secure energy system, it was crucial that pension schemes sent the market the right investment signals.

“The signal has to be that a swift, orderly transition is in everyone’s financial interests, particularly for scheme beneficiaries,” he said.

“However, the relationship between economics, climate science and assessing financial risk is not a comfortable one: as this report demonstrates, the advice pension schemes are receiving risks trivialising the potentially huge damage climate change will have to asset values,” said Campanale.

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