Loading the DICE against pension funds: Flawed economic thinking on climate has put your pension at risk
This report, which I wrote for Carbon Tracker, has just been released (Keen 2023). The main report can be downloaded from this link, after logging in to Carbon Tracker (which just requires submitting your email and a password—no financial involved):
Loading the DICE Against Pensions - Carbon Tracker Initiative
I'd prefer if you downloaded from there, to enable Carbon Tracker to keep track of how many copies are in circulation. But I've also attached it to this post here:
There is also a freely downloadable Supporting Document (no login required):
Supporting-Document-To-Rolling-The-DICE-How-Did-We-Get-Here.pdf (carbontracker.org)
This report shows that pension funds have drastically underestimated the damage that climate change will do to pensions, not through any wrongdoing on their part, but because they were advised by consultants who trusted refereed papers published by mainstream economists.
This report extends the research I did for the paper "The appallingly bad neoclassical economics of climate change" (Keen 2020). It details how ludicrously bad research by economists has been taken at face value by pension funds, financial regulators and governments, resulting in the pitifully weak responses that humanity has made to date to the threat of climate change. Comments like the following from a Federal Reserve Governor are a direct product of the juvenile analysis of global warming by mainstream economists:
Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States. Risks are risks. There is no need for us to focus on one set of risks in a way that crowds out our focus on others. My job is to make sure that the financial system is resilient to a range of risks. And I believe risks posed by climate change are not sufficiently unique or material to merit special treatment relative to others. (Waller 2023, p. 1)
In reality, the threats from climate change are utterly unique in human history, and dwarf the importance of all other risks to our financial, economic and social systems. Assurances by economists that increases in global temperatures of as much as 7ׄ°C will have only a trivial impact on the economy—reducing annual economic growth by a mere 0.02% (Howard and Sylvan 2021, Figure 11, p. 23)—will soon be blown out of the water by the climate itself. The weird weather of 2023 is just a foretaste of what is to come, now that global warming has reached the +1°C levels that concern scientists.
Please download this report (and the Supporting Document), read it, and share it as widely as possible.
Howard, Peter, and Derek Sylvan. 2021. "Gauging Economic Consensus on Climate Change." In. New York: Institute for Policy Integrity, New York University School of Law.
Keen, Steve. 2020. 'The appallingly bad neoclassical economics of climate change', Globalizations: 1-29.
———. 2023. "Loading the DICE against pension funds: Flawed economic thinking on climate has put your pension at risk " In. London: Carbon Tracker.
Waller, Christopher J. 2023. "Climate Change and Financial Stability." In Current Challenges in Economics & Finance. Madrid: IE University.
I'm seeing fewer explicit references to IAMs in pension fund climate disclosures, and more to Climate Value at Risk (CVaR) analyses generally provided my MSCI or WTW. For example, Japan's GFIP, New Zealand Superfund, and Norway's NBIM all mention using CVaR.
My sense is that, partially due to your and others' critique of DICE models and other IAMs, the funds have stopped using them or at least they've stopped referring to them explicitly. I'm curious what you make of this CVaR approach. I am having a hard time finding specifics on how it works. It seems to sometimes produce larger negative impact projections (GFIP estimates up to -9.3% impact on its returns and NBIM up to -13% in a 3°C world). I'm sure this approach cannot account for all climate risks like migration, tipping points, etc. but I'm curious if you have any specific knowledge of the framework and what it may be getting wrong.
I'm a huge fan of your Loading the DICE report. Thanks in advance.
Dear Steve, the Climate Brink Podcast is making a valid point: we can't safe the climate (and ourselves) without pushing back corporate power. https://open.substack.com/pub/theclimatebrink/p/i-stand-with-unions?utm_source=share&utm_medium=android&r=bg9mo