Financial institutions, banks and politicians misled by ‘flawed’ economic research

LONDON/NEW YORK, 27 July– Pension funds are risking the retirement savings of millions of people by relying on economic research that ignores critical scientific evidence about the financial risks embedded within a warming climate, warns a report released today by Professor Steve Keen and the financial think tank Carbon Tracker.

Financial institutions, central banks, regulators and governments underestimate the dangers and economic damages of climate change, relying on research from a small, self-referential group of climate economists that ignores the impact of climate “tipping points”, it says.

The author, economist Prof. Steve Keen, a Distinguished Research Fellow at University College of London and author of Can We Avoid Another Financial Crisis? argues that just as mainstream economists failed to predict the global financial crisis in 2008 – the worst economic crisis since the Great Depression – they could now be steering the world toward another crash.

“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,” he states. “We are talking about the financial futures of millions of people.”

The report reveals that many pension funds use investment models that predict global warming of 2 to 4.3°C will have only a minimal impact on member portfolios, relying on economists flawed estimates of damages from climate change, which predicts that even with 5 to 7°C of global warming economic growth will continue. The report underscores that such economic studies cannot be reconciled with warnings from climate scientists that global warming on this scale would be “an existential threat to human civilisation.”

Scientists warned last year that several tipping points risk being triggered in the next decade.[1] For example, loss of winter ice in the Barents Sea and collapse of deep convection in the Labrador Sea could lead to more extreme seasonal weather in Europe, worse than experienced during the Little Ice Age, with significant sea level rise on the northeast seaboard of the USA. These “tipping points” are not taken into account in the economic studies currently relied on by many mainstream investment models as used by financial institutions, as highlighted in a recent report by the Institute and Faculty of Actuaries (IFoA) and the University of Exeter.

The report, Loading the DICE against pension funds notes that these “scientifically false assumptions” by climate economists persist because their studies are typically peer-reviewed only by other economists, and fails to incorporate key science. This practice ignores the likelihood of predicted triggering “tipping points” that accelerate economic damage.

Widespread reliance on flawed research means a huge disconnect between current investment decision making, which assumes relatively trivial impacts from climate change, and the likely real-world effects of global warming.

Mark Campanale – Carbon Tracker Founder & Director said:

“To ensure that the world moves into a new climate secure energy system, it’s crucial pension schemes send 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. 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.”

These flawed climate risk models are used throughout the financial system, lulling economic decision makers, from pension funds to central banks, into a false sense of security. The result is cavalier positions such as US Federal Reserve Board Governor Christopher Waller who announced: “Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States.”[2]

The report warns of the serious prospect of an “unpleasant, abrupt and wealth destroying” “Climate Minsky moment” with a sudden collapse in asset values as financial markets wake up to the gap between mainstream economist forecasts and the reality of climate impacts.

Professor Tim Lenton – Chair in Climate Change & Earth Systems – University of Exeter said: “This is an important paper which further underlines the need for an alternative approach to assessing risks and opportunities associated with the net-zero transition. It is essential reading for asset owners and the wider investment industry.

Climate economists’ predictions of economic impact of climate change are ‘a hunch’

Prof Keen, the former Head of the School of Economics, History and Politics at Kingston University, London, and author of the report contrasts scientists’ empirical research with predictions by climate economists that are “a ‘hunch’ based on rather spurious assumptions for global warming, which have been used to generate equally spurious estimates of damages to future GDP.”

He underscores that global warming, at less than 1.5°C, is already affecting people and companies across the planet. Record heatwaves, floods, and intensifying storms halt commerce, damage crops, create uninsurable areas, and impair infrastructure, among other harms. The report quotes scientific research which finds that exceeding the 1.5°C Paris target would be “dangerous”, passing 3°C would be “catastrophic”, and reaching 5°C will be “beyond catastrophic, raising existential threats”.[3]

 Yet, despite scientific predictions, a survey of 738 climate economics papers in top academic journals found the median prediction of economists was that 3°C of warming would reduce global GDP by just 5%, and warming of 5°C would see a 10% reduction.[4] Nobel prize-winning economist William Nordhaus is even more sanguine, predicting that a 3°C rise would reduce global income by only 2% and 6°C by 7.9%, compared to what it would have been in the complete absence of global warming.[5]

While climate scientists and some leading economists, such as Nicholas Stern and Joseph Stiglitz, have challenged the inadequate climate risk models used in economic reports, the majority of economists have not aligned their reports with climate science.

Investment managers and consultants such as Aon Hewett, Hymans Robertson and Mercer continue to rely on flawed research when they advise pension funds on the impacts of global warming on members’ portfolios. For example, Mercer in advice to Australian fund HESTA[6] predicts only a -17% portfolio impact by 2100 in a 4°C scenario. It states that its model primarily reflects coastal flood damage and does not take account of climate tipping points.

Mercer advises LGPS Central, which manages £55bn of retirement savings for a million members of Local Government Pension Schemes in the UK. One of these schemes, Shropshire County Pension Fund, told members that a trajectory leading to 4°C by 2100 would only reduce annual returns by 0.06% in 2030 and 0.1% by 2050, saying that it relied on LGPS Central for information.

In a 2022 report, 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.”

“Each layer in the process of assessing the risks of climate change has assumed that the previous layer has done its job adequately, and has relied on the previous layers reputation, rather than scrutiny of the  work undertaken. Pension funds rely upon consultants because of their reputation in the field; consultants rely upon academic economists, because their papers had passed (academic) refereeing.” The final impact is a series of flawed economic assumptions informing pensions’ decision making.

Flawed mainstream economic studies also influence global economic policy:

  • The Financial Stability Board (FSB) predicts that a 4°C rise in global temperatures would reduce global asset prices by 3-10%.
  • The Network for Greening the Financial System (NGFS), which has 130+ central banks as members, projects that 3.5°C of warming could reduce global GDP by 7-14% in 2099.
  • The Intergovernmental Panel on Climate Change concluded in a 2022 report that 4°C of warming would reduce global output in 2100 by only 10-23%.

Most financial market participants accept figures from the FSB, NGFS, and consulting firms like Mercer as accurate so “it is highly likely that stock market valuations are wildly out of step with the future course of stock prices, dividends and GDP in a climate-changed world,” the report says. Financial regulators must drastically revise the stress tests they use to test the exposure of financial institutions to climate change.

“These predictions of the minimal economic impact of global warming of 2 – 4.3°C are representative of the advice being given by pension funds worldwide to their members,” the report says. Pension funds have a fiduciary duty to correct the methodologies on which they rely, as well as the information they have given clients, the report says. It concludes: “This report is a call to all stakeholders, from governments, regulators, investment professionals, all the way to civil society groups and individuals, to ensure that the critical error of taking this unsound (economic) research seriously is reversed, before it is too late. Climate change policy should be based upon the work of scientists, rather than the the small group of economists who have worked on climate change, and “must be treated as a potentially an existential threat, rather than an issue which is suitably addressed by economic cost-benefit analysis.”

Tony Burdon, CEO of Make My Money Matter said:

“This report shows that the climate models used by our pension funds are not only implausible – they’re dangerous too. This so called ‘expert advice’ is underpinning the investments of millions of UK savers, yet is jeopardising both our pensions and the planet.

When temperatures on Earth last rose 5 degrees, 95% of living species were wiped out, and sea levels rose 20 meters. Yet these models suggest the impacts of such temperature rises on GDP – and our pensions – will be minimal. These predictions are flawed, complacent and dangerous. Pension funds have a fiduciary duty to urgently act on this report, and take immediate steps to protect both our pensions, and the planet.”


Professor Keen analysed the Integrated Assessment Models (IAMs) used by climate economists to estimate the future economic damages of climate change, assessed the empirical literature cited as inputs to the IAMs, and compared and contrasted these against the latest climate science, with a focus on impacts which the models commonly ignore – including climate tipping points, and more appropriate damage functions to model GDP impacts. Carbon Tracker sent Freedom of Information Act (FOIA) requests to more than 100 local government pension schemes (LGPS) and pools in England, Wales and Scotland, to assess the extent to which their management of climate risks, investment strategies and asset allocation decisions appear to be influenced by external investment consultants. Around 80% of LGPS funds use investment consultants, with Mercer working with 50% of the LGPS sector.

Once the embargo lifts the report can be downloaded here: ‎



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About Carbon Tracker

The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble, unburnable carbon and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future.


[1] Armstrong McKay et al, 2022, ‘Exceeding 1.5°C global warming could trigger multiple climate tipping points’
[2] Christopher J Waller, 11-5-23, Climate Change and Financial Stability, Federal Reserve
[3] Xu and Ramanathan 2017, ‘Well below 2°C: Mitigation strategies for avoiding dangerous to catastrophic climate changes’
[4] Howard and Sylvan 2021, ‘Gauging economic consensus on climate change’
[5] Nordhaus, 2018, ‘Projections and Uncertainties about Climate Change in an Era of Minimal Climate Policies’
[6] HESTA, 2021 – ‘Our Path to Net Zero’ pg 17