A 2022 climate report from one Aussie super fund caused controversy with its estimate that a 4.3℃ temperature rise presented an “acceptable” risk to the fund’s portfolio. A new report claims that such numbers come from climate-risk consultants who’ve been peddling dodgy advice to funds for years. Zacharias Szumer reports.
Late last year, a climate report from Aussie pension fund UniSuper caused a stir. Buried somewhere in the latter pages of Climate Risks and Our Investments: Investing in a Bright Future, was an assessment that, even under a “worst case” scenario of a 4.3℃ temperature rise, “the overall risk to [UniSuper’s] portfolio is acceptable”.
The “sooner UniSuper accepts that there won’t be an economy with 4.3 degrees warming, the safer its investments will be,” shot back Harriet Kater, climate lead at the Australasian Centre for Corporate Responsibility.
However, in media reports at the time, it wasn’t explained how UniSuper had arrived at its controversial conclusion. A new report by independent financial think-tank Carbon Tracker seeks to do just that.
The report, authored by economist and research fellow at University College London Steve Keen, argues that many pension funds are using the same consultants for advice on the risk of climate change to their assets.
As a result, UniSuper is far from alone in its underestimation. Research by MWM shows Aussie funds such as HESTA, Australian Ethical and CBUS have also used the same consultants.
By following the advice of these consultants, who have in turn relied upon research from the “small group of mainstream economists who work on climate change,” Keen says that “pension funds have unwittingly and unintentionally misled their members.”
Climate change is happening, but it doesn’t really matter…
For several years, Keen has been a vociferous critic of mainstream climate economics. He certainly pulled no punches with a 2020 paper, titled The Appallingly Bad Neoclassical Economics of Climate Change. He describes this strand of climate economics as “easily the worst work I have read in half a century”.
These economists “don’t deny that climate change is happening,” Keen told MWM, “but they effectively deny that it really matters.”
One of Keen’s primary targets is William Nordhaus, who won the 2018 Nobel Prize in economics for his work on climate economics and has been a major influence in his discipline. Nordhaus has claimed that a 6-degree increase in global temperature would cause global gross domestic product to fall by less than 10 per cent.
Figures like this stand in stark contrast to the view of most climate scientists, who warn of massive, catastrophic risks from anything over 2°C.
The economists “are doing impeccable econometrics on stupid f..king numbers that they’ve made up that bear no relation whatsoever to the catastrophe we’re approaching,” Keen told MWM via email.
Keen claims that climate economists dramatically underestimate the true cost of climate change through a variety of faulty models and assumptions.
One weakness of their models is that many do not consider the effect of climate change on rainfall. A faulty assumption is that – because some cold areas of the world are rich and others are poor, while some hot areas are rich and others are poor – temperatures don’t predict economic outcomes today, and so they won’t in the future.
Another assumption is that 90 percent of economic activity happens in controlled environments like offices, warehouses, or underground mines and, therefore, will be unaffected by climate change. In a 2019 Twitter exchange, prominent climate economist Richard Tol claimed that, in a 10-degree warmer world, humans would “move indoors, much like the Saudis have.”
Keen says that “it’s ludicrous to presume that climate-controlled interior spaces will insulate humanity from planetary climatic shifts.”
“It could turn fertile regions into deserts, force farms … and the cities they support … to move faster than topsoil can develop, create storms that can blow down those ‘carefully controlled environments,’ and firestorms that burn them to the ground,” he wrote in 2020.
Increasingly volatile weather can also put stress on power grids, which flows through to the rest of the economy, Keen says.
This happened in China during a record-shattering heatwave in August 2022.
To ease demand on the power grid, the government ordered factories to close as residents were forced to set their air conditioners to full blast. Some activists were quick to point out that, although Nordhaus had once argued that “microprocessor fabrication” wouldn’t be directly affected by climate change, the power shortage forced such factories to close.
Are the economics of climate change getting better?
In 2022, the Intergovernmental Panel on Climate Change released a new report on climate impacts. However, Keen says that its economics section hasn’t meaningfully improved.
“In a nutshell, no. Their work hasn’t gotten better. They’re as delusional as ever,” Keen told MWM via email. He said that many of the more recent studies used in the report still contain “ludicrously low estimates” of the economic impact of climate change, such as falls of 3-7 per cent in GDP from a 4-degree warmer world.
Keen’s nemesis agrees that his attack on the discipline hasn’t changed things.
“Keen’s attack had no impact as far as I can see,” says climate economist Dr Richard Tol, who is one of Keen’s primary adversaries.
“Although people who have worked in the field for decades are still baffled by the economic impacts of climate change, Keen claims to know these with great certainty,” Tol told MWM earlier this year.
In 2015, Tol pulled out the writing team of a draft United Nations report to support climate agreement negotiations, claiming that his colleagues were being too “alarmist” about the threat of climate change. In a 2016 working paper, he wrote that “climate change is a relatively small problem that can easily be solved”.
It’s “no surprise,” Keen’s criticisms have had little impact, Tol wrote via email. “Keen is a fairly marginal figure in the economics discipline, and he published his critique in non-economics journals.”
However, it’s not just Steve Keen who’s been criticising the work of economists like Tol. And many of these critics can’t be dismissed as marginal.
A 2022 paper by renowned economists Nicholas Stern and Joseph Stiglitz argued that “the immensity of the risks … takes us outside the narrow confines of these models, yet the economics profession on the whole has been too slow to look beyond them.” The economic models being used have a “fundamental problem”, the authors write, which makes them ill-suited to “analysing problems of deep uncertainty, extreme risk … [and] intergenerational equity”.
Stiglitz and Stern have both served as chief economist and senior vice president of the World Bank. Stiglitz is also a former chairman of the US President’s Council of Economic Advisers and, like Nordhaus, has won the Nobel prize in economics. Stern was once the second permanent secretary of the UK treasury, and head of the UK Government Economic Service.
Of course, their illustrious resumes don’t mean that they’re right – but they’re certainly not marginal figures. And they’re not the only ones who think Keen may have a point.
Gernot Wagner, an economist at the Columbia Business School, wrote in 2021, that “neoclassical economics is still blocking progress” and:
the discipline is long overdue for its own tipping point toward new modes of thinking commensurate with the climate challenge.
A 2021 review paper by an international team of climate researchers also questioned how mainstream economists “are able to recommend ‘optimal levels of climate change’ that correspond with a serious risk of extreme and irreversible changes to the conditions for life on Earth.”
Super funds’ numbers not so super?
So, what does this have to do with Australian super funds?
Keen’s new report, Loading the DICE Against Pension Funds, argues that this economic research undergirds the work of the consultants that super funds rely upon for estimates of how climate change will affect their investments.
Such estimates have become increasingly common in recent years, as activists apply greater pressure to the Australian super sector, which oversees assets worth over $3 trillion – more than the total market cap of the Australian Stock Exchange.
Many of the funds use the same consultants, so UniSuper isn’t the only one with a questionable estimate of how much climate change will cost. Keen’s report primarily focuses on UK pension funds, but a cursory look at some Australian super funds reveals some interesting numbers.
A 2021 climate change report by the Health Employees Superannuation Trust Australia (HESTA) concludes that warming of 4°C would lead to a loss in value on returns of 15-20 per cent by 2100.
However, that estimate assumes HESTA makes “no change to the investment strategy in response to those [climate change] risks.” This suggests that the fund might be able to protect its members’ savings in a 4°C warmer world by reallocating investment into sectors in which damages will be less severe.
HESTA’s report uses research from Mercer, a prominent consultancy firm that has done climate change consulting for over a decade. Mercer is listed as a source of figures for the 2022 UniSuper report. Australian Ethical’s Sustainability Report 2022 also uses Mercer’s research to calculate long-term, risk-adjusted returns.
In 2015, Mercer prepared a report for Construction and Building Industry Super (CBUS) titled ‘Investing in the Time of Climate Change.’ Under the report’s “higher damages” scenario, “shifts in long-term weather patterns and impact on resource availability” would lead to an estimated loss of 0.8 per cent in GDP by 2050, while “physical damages caused by catastrophic events, such as floods and hurricanes” would lead to an estimated loss of 0.7 percent in GDP by 2050.
The new Carbon Tracker report says that Mercer’s models have improved somewhat in recent years, but earlier work “manifests all the pivotal weaknesses in the economic literature”.
A climate financial crisis
While Mercer is used by Keen as a representative example, the new report emphasises that this outfit is “by no means alone” in relying upon “flawed economic analysis”.
“The evidence indicates that their advice is typical of the advice offered to pension schemes by a wide range of consultants working in the investment consultant community globally.”
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 upon the previous layer’s reputation, rather than scrutiny of the work undertaken. Pension funds relied upon consultants, because of their reputation in the field; consultants relied upon academic economists, because their papers had passed refereeing.
Given how widespread such optimistic assumptions are, the paper warns of a real chance of a “sudden major collapse of asset values”, such as what occurred in 2007-2008, due to a “sudden realisation of the gap between market aspirations and economic reality.”
Before this happens, the report urges funds to “let their members know that the past guidance they have given on the impact of global warming on pensions is unsound”.
If members could realise that their personal futures will be dramatically and deleteriously impacted by future climate change, this could help shift public sentiment in favour of drastic government and private sector action in the near term to prevent further climate change.