“Flawed” advice and research on the financial impact of climate change is putting Local Government Pension Scheme (LGPS) funds’ assets at risk, a new study has revealed.
A new study by think tank Carbon Tracker has found that many pension funds use investment models that predict global warming of 2 to 4.3°C will have only minimal impact on member portfolios, relying on economists’ “flawed” estimates of damages from climate change.
The research argued that advice to funds given by many LGPS consultants, such as Mercer and Hymans Robertson, has been drawn from this economic analysis, which has underplayed the consequences of global warming on pension funds’ investments.
“Funds are advised global warming of 2 to 4.3°C will have minimal impact on members’ portfolios, contrasting with scientific research suggesting warming on this scale would pose an existential threat to human civilisation,” the report explained.
‘Tipping points’
Carbon Tracker argued that pension fund consultants, financial regulators and governments have relied too heavily on this research, which is from a small, self-referential group of climate economists that does not take into account the impact of so-called climate “tipping points”.
Scientists warned last year that several “tipping points” risk being triggered in the next decade. 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.
These “tipping points” are not considered in the economic studies currently relied on by mainstream investment models as used by financial institutions.
Carbon Tracker revealed that consultant Mercer, in advice to Australian fund HESTA, predicts only a -17% portfolio impact by 2100 in a 4°C scenario. It stated that its model primarily reflects coastal flood damage and does not take account of climate “tipping points”.
Mercer also advises pension pool LGPS Central, which has combined assets of £55bn, and claims to work with 50% of the LGPS sector.
The research found that Shropshire County Pension Fund’s Climate-Related Disclosure report in 2021 stated that a 4°C rise by 2100 would reduce annual returns to 2030 by 0.06% and by 0.1% by 2050, suggesting that this figure relied upon information from its pooling vehicle LGPS Central, which “uses an external service provider” – Mercer.
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Professor Steve Keen, author of the report and research fellow at the University College of London, said: “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 layer’s 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.”
In response to Carbon Tracker’s report, a spokesperson from Mercer stated that the research “presents an incomplete, and therefore misleading, summary of Mercer’s climate change analysis”.
“Carbon Tracker’s report analysis focuses on older versions of Mercer’s climate change model. Climate scenario models evolve as more information about climate change and global warming becomes available.
“As Carbon Tracker acknowledge, Mercer has developed a new model in collaboration with Ortec Finance. This model reflects our current point of view and produces scenarios with different impacts than those cited in the report,” the spokesperson added.
Room151 also contacted Hymans Robertson for a response, however they did not wish to comment.
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