Flawed economic modelling could leave global markets exposed to a climate-driven financial crash, according to research by the University of Exeter and financial think tank Carbon Tracker Initiative.
In a report published this week, they argue that traditional models underestimate the risks posed by extreme weather and ecological tipping points, such as the collapse of Atlantic ocean currents or Greenland’s ice sheet.
These events, which scientists believe may be approaching, could trigger cascading failures across economies.
“We can’t bail out the Earth like we did the banks,” said Dr Jesse Abrams of Exeter.
Most economic forecasts assume gradual changes in average temperature and stable growth. But the report, based on a survey of 68 climate scientists worldwide, says those assumptions break down in a world of compounding climate shocks.
Current models also fail to account for human and ecosystem impacts, and may even count disaster recovery spending as economic growth.
Actuaries have estimated a 50% hit to global GDP from climate shocks by the end of the century.
Mark Campanale, CEO of the Carbon Tracker Initiative: “The net result of flawed economic advice is widespread complacency amongst investors and policy makers, with many investors viewing climate scenario analysis as a tick-box disclosure exercise."
He said financial institutions "will continue to chronically under-price climate risks" and leave pension funds and taxpayers "dangerously exposed", while there remains this gap between what scientists and economists expect for future climate damages and what government bodies are doing.
In the past week, the UK government issued a landmark security assessment of ecosystem collapse.
This, said Laurie Laybourn, executive director of strategic climate risks at the Initiative, shows how we are "currently living through a paradigm shift in the speed, scale, and severity of risks driven by the climate-nature crisis".
"Yet, beyond this report, there has not been a corresponding paradigm shift in how regulators and government as a whole assess these risks.
"Instead, they’re routinely underestimated if not missed entirely, meaning many regulations and government action are dangerously out of touch with reality.
"This threatens disaster when that reality catches up with us. So, it’s critical that policymakers change course, providing clear signals and guidance to markets that these risks should be priced accordingly, rather than downplayed."