A new study finds that banks underestimate the damage and disaster risk from the climate crisis | finance

Banks often use mathematical models to design future scenarios and predict the impacts on their business. Thus, they try to get the best results in the face of possible changes in inflation, interest, exchange rate, employment, economic activity and other variables. The climate crisis and its fallout are playing an increasing role in these models—but banks Minimize the risks and uncertainty caused by these changesprompts a new scan.

The models used led to many “implausible” results, indicating a significant “disconnection” between banks and those who directly study climate change and its potential impacts, such as scientists and economists, according to a report Made by Institute of Actuarial Sciences, University of Exeter, in the UK. The survey was coordinated by Sandy Trust, professor at Exeter, advisor to the institute, executive officer at financial management firm M&G and former director of EY.

The “implausible” findings cited by the scientists include, among other prejudices, the supposed positive effects of global warming in countries with very cold climates. These analyzes leave aside the severe risks that may affect all countries (including those with cold climates) and the uncertainties of change – that is, new consequences that we cannot even assess today. “It’s as if we’re designing a scenario where the Titanic hits an iceberg, but we rule out the possibility of the ship sinking. It’s critical that we develop realistic scenarios that consider worst-case scenarios and reflect the risks we face,” the Trust told the university’s website.

According to the research, many models exclude dangerous effects of climate change, such as sea level rise, mass migrations, and global warming (with multiple impacts on public health and business). The models also ignore the uncertainty created by points of no return, which are situations in which changes begin to occur and cause consequences such as the melting of the ice cap in West Antarctica or the Amazon forests (the researchers use melting ice as an example in the Himalayas, which would affect an area with a population of 2 billion people in Asia). In addition, many models do not include the very real probability that global warming will inevitably reach 1.5°C (the limit that was considered avoidable when the Paris Agreement was signed in 2015).

As an example, the researchers mentioned models of the international network of central banks to make the financial system greener (the network of greening the financial system or NGFS). The models assess the decline in global production if the average temperature on the planet rises by 3°C, but without integrating different consequences, such as natural disasters and social impacts. NGFS models have been used at various times by large banks in Brazil, such as Bradesco (2023), Santander (2022) and Itau. (2020).

Tim Linton, another co-author of the study, notes that many economists expect “relatively little economic harm” from warming. “It is imperative that financial services institutions and regulators move towards realistic scenarios that recognize the potentially catastrophic risks posed by climate change,” says Linton. “We have very little time left to deal with incremental climate change. Now it takes a huge shift and acceleration of progress.”