Why climate models struggle with acute physical risks
"Top-down" modelling approaches can't properly capture extreme weather-related events at the local scale, leaving financial institutions blind to major risks.
Climate models have a major blind spot: they can’t see extreme weather-related risks. This is a big problem for financial institutions, since these kinds of threats — also known as acute physical risks — could hammer their investments and sap their capital. But despite their shortcomings, financial supervisors are already using these flawed models to assess firms’ climate resilience. In doing so, they risk producing a warped picture of the financial system’s ability to withstand future climate shocks.
That’s the conclusion of a recent paper in Environmental Research: Climate from a high-profile group of climate experts — among them the director of the UK’s new Centre for Greening Finance and Investment. Its publication comes at a turbulent point in the debate over climate-related financial risk analysis. Stuart Kirk, the former Head of Responsible Investment at HSBC Global Asset Management, recently gave a now-infamous presentation accusing the Bank of England of manipulating this year’s climate stress test to exaggerate the threat of global warming to the financial system. Elsewhere, the Real World Climate Scenarios (RWCS) initiative, the brainchild of a small cadre of climate finance professionals, is challenging conventional approaches to climate scenario analysis by promoting the use of narratives, rather than quantitative models, as a way to project the socioeconomic impacts of climate change.
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