Climate-scenario modeling is an important tool used by financial services to investigate how different combinations of risks could impact the future solvency of a financial entity and what action could be taken to mitigate those risks. Our research shows that current climate-scenario modeling excludes many of the most severe impacts we can expect from climate change, including tipping points and second order impacts. (Please see our report, The Emperor’s New Climate Scenarios and its follow-up, Climate Scorpion – The Sting is in the Tail.) The consequence of this is that the results emerging from the models are far too benign, even implausible in some cases. It’s as if we are modeling the scenario of the Titanic hitting an iceberg but excluding from the impacts the possibility that the ship could sink, with two thirds of the souls on board perishing. This means the usefulness of the current scenarios is limited, as they do not communicate the level of risk adequately. More dangerously, the artificially benign results can easily serve as an excuse for delaying action, as consumers of these results, such as policymakers and business leaders, may reasonably believe the results to adequately capture the risks. Our report highlights areas of challenge, as well as providing ideas on ways to develop scenario techniques to better capture the severe risks we face. We hope this more realistic assessment of risk will act to further catalyze the collaboration and investment into solutions that is required to ensure these risks don’t materialize.
Sandy Trust of the UK’s Institute and Faculty of Actuaries (IFOA) Council presented, with an introduction by Madison Condon, of BU School of Law.
See the slides here: Climate Scorpion – The Sting is in the Tail.
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