Investors and their advisors may be making a dangerous mistake if they allow climate modelling to give them a false sense of certainty over the physical impacts to be expected from climate change, according to a new article in the journal Nature Climate Change.
It isn’t that there’s anything wrong with the modelling. But it’s meant for a different purpose, and misusing it—however inadvertently—could lead to bad decisions based on faulty assumptions, the scientists say. That disconnect points to the need for climate “translators” who are “qualified to help regulators, investors, and companies make better use of the science,” Reuters reports.
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“The problem is that existing climate models have been developed to predict temperature changes over many decades, at global or continental scales, whereas investors generally need location-specific analysis on much shorter time frames,” the news agency explains. So “improper use of climate models could lead to unintended consequences, such as ‘greenwashing’ some investments by downplaying risks, or hitting the ability of companies to raise debt by exaggerating others.”
In particular, longer-term climate models won’t predict specific, shorter-term extreme weather events, like storms, that can produce severe financial losses.
“Businesses like using models, because the numbers give them a sense of security,” said lead author Tanya Fiedler, a lecturer at the University of Sydney. “It doesn’t necessarily mean the numbers are reliable.”
“In the same way that a Formula One Grand Prix car is not what you would use to pop to the supermarket, climate models were never developed to provide finessed information for financial risk,” added University of New South Wales climate scientist and study co-author Andy Pitman.
The analysis lands at a time when interest in environmental, social, and corporate governance (ESG)-oriented investments is rising at what Bloomberg News calls a “simply astounding” rate.
“Governments, corporations and other groups raised a record US$490 billion last year selling green, social, and sustainability bonds,” Bloomberg writes. “A further $347 billion poured into ESG-focused investment funds—an all-time high—and more than 700 new funds were launched globally to capture the deluge of inflows.”
The year ahead “is shaping up to be just as frothy,” the news agency adds, with Moody’s Investors Service predicting $650 billion in sustainability-oriented lending. In a recent report, the ratings agency said 2021 will be a year of “green stimulus, as major economies attempt to integrate their economic recovery and job creation initiatives with their longer-term efforts: to reduce greenhouse gas emissions.”
“We expect green bond issuance to jump by 39% this year as the economy continues to rebound and issuers increasingly pursue debt financing for environmentally-friendly projects,” said Moody’s analyst Matthew Kuchtyak told Bloomberg.
European sustainable funds account for about 81% of the $1.65 trillion invested worldwide, Bloomberg adds, citing research by Morningstar Inc., while the total in the U.S. more than doubled last year to $51.2 billion.
But as the market grows, Kuchtyak and Peter Krull, founder of Earth Equity Advisors, cited mounting concerns that ESG funds are investing in industries that aren’t doing all that much to reduce emissions. “Too many of the so-called ESG funds are investing in industries and companies that have done little to lessen their carbon footprint,” Bloomberg writes, citing Krull.
“We anticipate there will be an increasing focus on refining standards around sustainable bonds, in part as a way to address these investor concerns, but also to protect consumers and ensure alignment with energy and climate policy,” Kuchtyak added.
