August 14, 2021 | Published by | , ,

Picture: Money grows. Credit: Nattanan Kanchanaprat (Pixabay)

by Andy Pitman
When Chaucer wrote The Pardoner’s Tale in around 1390, he was writing in a period where the climate of the northern hemisphere was cooling from the “Medieval Warm Period” towards the “Little Ice Age”. This was part of a natural change in our climate that humans had no control over.

Times have changed, and as the Earth warms past 1.1oC, on to at least 1.5oC – and if we don’t act dramatically upwards past 3.0oC – science has built the understanding that this warming is caused by human activity and changing that activity is a way to stop and reverse the warming.

Which brings us to money. While Chaucer wrote “The love of money is the root of evil” there is a growing recognition that how money flows through the national and global economy, how investors choose to prioritise investments, and how statutory authorities such as the Australian Prudential Regulation Authority (APRA) regulate business around climate risk all have the potential to help solve the climate problem. Indeed, it is vital to stop thinking about climate change “just” as an environmental problem, or a sustainability problem and recognising it as an economic risk.

Over the past few years (ok, over the past few decades) climate scientists had been highlighting, emphasising and communicating climate risk. The banking and investment sector has heard us. The Bank of England, via Mark Carney, talked of the risk of financial instability due to climate change. Closer to home, Geoff Summerhayes, then at APRA, wrote to all regulated entities stating that it would conduct “vulnerability assessments” to better understand the financial impact of climate change on the country’s largest financial institutions. In May 2021, APRA sought information on who could provide physical climate risk data for assessing climate risk. In that request, APRA sought future climate risk information, ideally every 5 years, for acute physical climate risks and including multiple physical risks including some in combination. Oh, and at a spatial detail that allowed examination of, or separation of, risks across multiple Australian businesses.

Responding to some of these issues, a paper was published led by Tanya Fiedler with three authors from CLEX: Andy Pitman, Christian Jakob and Sarah Perkins-Kirkpatrick. In that paper, we stated:

Calls for the integration of climate science into risk disclosure and decision-making across many levels of economic activity has leap-frogged the current capabilities of climate science and climate models by at least a decade.

Several Chief Investigators in CLEX have been highly active in the past four months talking to business about what the Fiedler et al. (2021) paper says, and what it does not say, and about using climate model projections for assessing financial and business risk. Amongst those groups, we have connected with the Network for Greening the Financial System (NGFS). While this group is unknown to most in the climate science world, it includes 83 central banks. A great deal of money flows through those central banks. We have communicated with multiple financial organisations, including Lazard Asset Management (they manage $300 billion). We ran a webinar, wrote several advice statements and critiqued a white paper written by S&P.

Why are we doing this? Well, Google “Climate risk information”. You will find some remarkable products. There are literally hundreds of commercial “Climate Service Providers” out there that offer products, for a price. Some offer remarkable products around meteorological risk, sourced in one way or another from global climate models. Want to know how vulnerable your own house is to climate risks in 2050? Want to know the patterns of bush fire risk your business is exposed to? Want to know what specific meteorological threats you are exposed to in 2030 and 2050? No problem, just sign a cheque. Want to know the detail of how a Climate Service Provider does this, and how uncertainty is propagated and how useful the predictions are? Well, “commercial in confidence” is a phrase you will get quite used to.

I want you to imagine you have a lazy $100 billion to invest in climate risk mitigation. How? It is hard right, but you have to make decisions. On one side, you have a commercial Climate Service Provider offering you a quantified measure of risk at an individual property or suburb level. On the other side, you have climate scientists and modellers saying “you cannot have that information – no chance”. What do you do with your $100 billion? You probably decide “well, some information is better than no information so let’s go with the nicely packed climate service data”.  It must be better than nothing… surely.

Here is what frightens me. The extremes that trigger most severe climate risks are not resolved in our climate models. I mean, not at all. The detailed synoptic response patterns to global warming are barely resolved. So, I doubt we know the sign of the change in many extreme events under warming. I am thinking here of those events that occur once, twice or a few times a century. If you think global climate models simulate those, for the right physical reasons you really need to think again.

Consequently, that commercial Climate Service Provider may well sell you a product, but it might be profoundly (and I mean the sign of the change) wrong. No one knows. Yes, we know it will get warmer and that rainfall will intensify on average. But we are not talking about averages here – we want to know the change in the rare extremes. Being misled in how much these things change really matters for mitigation and adaptation. You should care too as it affects your superannuation, your taxes, and even your insurance rates.

So, a few of us are talking to major financial and banking groups to help them understand what is already available from climate models, what can be used, what cannot be trusted and what ways forward we have. We have been trying to explain how institutions can find more robust and reliable sources of risk, or what the limits are to our knowledge. Ultimately, we need new modelling tools, informed by new process-level science that can predict the way climate and weather interact. In the meantime, getting our major financial organisations and regulators to align their investments based on quality science and not a misuse of climate models could mean that rather than Radix malorum est cupiditas we could have Pecunia eruatis animas nostras de mutatione aeris.

* Note, after 6 years of studying Latin I scored 6%. My translation is wholly dependent on Google Translate and no further discussion will be entered into