Pension funds are risking economic catastrophe by relying on flawed economic advice around climate risk, finds a new report published by the think tank Carbon Tracker. 

Financial institutions are underestimating the dangers and economic damages of climate change by relying on research from a small group of climate economists that ignores the impact of climate “tipping points”, says the report, which was authored by economist Steve Keen. 

The evidence suggests that just as mainstream economists failed to anticipate the global financial crisis in 2008, they could once again be steering the world towards another crash as a result of this underappreciated climate risk.

The report finds that many pension funds use investment models predicting that even global warming of 2–4.3°C – cited by the Intergovernmental Panel on Climate Change and others as “catastrophic” – will have only a minimal impact on investment portfolios.

Climate economists’ “scientifically false assumptions” persist because their studies fail to incorporate the latest science, and are peer-reviewed by other economists who do the same.

Other evidence cited in the report shows that some economists are suggesting economic growth will continue even in a warming scenario of 7°C, only it will occur more slowly.

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The report is the result of new analysis of the Integrated Assessment Models used by major climate economists to estimate the future economic damages of climate change, as well as Freedom of Information Requests sent by Carbon Tracker to more than 100 local government pension schemes (LGPS) in the UK.

One LGPS – Shropshire County Pension Fund – models that there will only be a -0.1% impact to portfolio returns by 2050 in a 4°C warming scenario.

Pension funds represent the biggest source of institutional capital in the world, worth $58.9trn (€53.42trn) in the OECD at the end of 2021. Experts spoken to by Energy Monitor highlight that the failure of pension funds to properly account for climate risk means that they will maintain non-Paris Agreement-aligned investment portfolios. 

"When you wear the wrong glasses, you can't see straight, and that is what is happening with pension funds,” Lucie Pinson, director of the NGO Reclaim Finance, told Energy Monitor. “They are using scenarios that play down the urgent need to reduce our emissions and therefore the need to reduce fossil fuel production. 

“These pension funds are driving us off a cliff-edge by investing in companies that are developing new fossil fuel projects, which will ultimately become a financial risk. If these projects are used for their full lifetime, the resulting greenhouse gases will rise to such levels that we will exceed all the tipping points, delivering a cascade of climate and financial risks.”

Read more from this author: Nick Ferris

Data from German NGO Urgewald’s Investing In Climate Chaos initiative shows just how significant institutional investor capital – and in particular, pension fund capital – is in continuing to finance the fossil fuel industry. 

Urgewald finds that more than 6,500 institutional investors hold bonds and shares in coal, oil and gas companies to the tune of $3.07trn. Major pension funds including the South Korea National Pension Service, CalPERS (California Public Employees’ Retirement System) and the South Africa Government Employees Pension Fund all have billions invested in fossil fuels.

Mark Campanale, founder of Carbon Tracker, told Energy Monitor that financial consultancy Mercer is one company that has updated its financial advice to pension funds.

“But that does not mean that they have gone back and told everyone they advised that they have updated their advice,” says Campanale. “When pension funds have their advisory meetings, they have so many things on their agenda that they are continually pushing climate risk down the list of priorities.” 

Campanale adds: “What should be happening now is that the pension schemes controlling these trillions of dollars of assets should be moving themselves away from the fossil fuel system, and instead investing in infrastructure that we need for the new energy system, as well as climate adaptation measures.”

The world is in desperate need of such investment if it is to decarbonise by mid-century and limit global warming to 1.5°C. Nowhere is this more true than in the Global South, which has long struggled to attract clean energy investment. Africa, for example, is home to 60% of the best solar resources globally, yet only 1% of installed solar PV capacity.

Recent Energy Monitor reporting, however, highlights why pension funds remain reluctant to invest in renewables in Africa, despite numerous developers with investment-grade projects looking for financial backing on the continent.