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Global financial system at risk from flawed climate models

Global Financial System at Risk From Flawed Climate Models

Global financial system at risk from flawed climate models

A team of Australian scientists, financiers and economists have issued a stark warning over the use of “flawed” climate models to predict financial risk.

Writing in the journal Environmental Research they say building future strategies on information that is not understood and potentially misleading is likely to expose the global financial system to systemic risks of its own making.

Politicians and policy-makers are increasingly seeking to assess the potential risks to the financial system associated with climate change. They typically use a combination of databases for the global mean temperature in conjunction with so-called coupled climate models to determine regional and more local changes such as the effect on cities. According to this new study however this approach is flawed and ineffective. “We show that global mean temperature provides little insight on how acute risks likely material to the financial sector will change at a city-scale, say the researchers.

They investigate how good using estimates of global mean temperature are at predicting changes in the annual extremes of temperature and rainfall, as well as heatwaves and drought, and extreme rain and strong winds. They also ask whether such climate attribution studies can provide any insight into the changes in temperature and rainfall over the next 20-, 50- and 100-years. Their conclusion; “these approaches are likely to be flawed,” they say because of the unappreciated uncertainties.

They point out that according to their analysis, and those of others, indicates that the translation of global mean temperature datasets into estimates of extremes is a process so bad that confidence cannot be had in either the magnitude of predicted change, or even in the sign of those changes.

The uncertainty dwarfs any signal from emission scenarios, at least over the next 50 years.”

They add that when it comes to climate models accuracy and precision are not the same thing; physical climate models are very precise, but not necessarily accurate especially when applied to problems they were not designed for. Frequently no uncertainty information is provided to banks and other institutions conducting long-term studies and stress tests.

Because they find no useful link between global mean temperature and material risks they call for a review of the practice.

There are risks in employing the approaches used by, for example, the Network of Central Banks and Supervisors for Greening the Financial System.”