Of the many knock-on effects of climate breakdown on the economy, what seems to have had little consideration by the Government, or explanation in the press, is the potentially devastating effect on pensions – not just those of future generations but of those holding pensions now.
Last year I met with representatives of the actuarial world Louise Pryor and Nick Spencer, President of The Institute and Faculty of Actuaries (IFoA), and council member and chair of the Institute’s sustainability board, respectively: go-to experts on calculating risk for insurance companies and pension funds.
They were, for all their dispassionate analysis, despairing of the dismissal of their warnings on this subject, both by media outlets and the Government who responded with the standard Johnsonian accusation that they were “doomsters and gloomsters”, seemingly oblivious that calculating risk is their raison d’etre. And the gloom is not baseless.
Carbon tracker very recently revealed that many pension funds were dangerously ignorant of the science, using “investment models that predict global warming of 2 to 4.3°C will have only a minimal impact on member portfolios, relying on economists (sic) flawed estimates of damages from climate change, [predicting] that even with 5 to 7°C of global warming, economic growth will continue.”
The report cautions in no uncertain terms that such flawed economic studies cannot be reconciled with warnings from climate scientists that global warming on this scale would be “an existential threat to human civilisation.”
Three provisional scenarios
Pryor and Spencer envisage three provisional scenarios of hits to pension fund returns.
The Paris Orderly Transition Pathway, a scenario that assumes climate policies are introduced early and become gradually more stringent. The Paris Disorderly Transition Pathway, a scenario which explores higher transition risks due to government policies being delayed or divergent across countries and sectors, and, worst case scenario, a Failed Transition.
The Orderly Pathway, which accepts that even with Paris Agreement compliance we have now locked-in physical impacts harmful to the economy, shows an economic fall-off of around 15% over 30 years (the standard cut-off for actuarial projection), the best we can expect at 2 degrees Celsius warming. Even with this ‘best case’ scenario, the projected trajectory is downwards.
The Disorderly Transition projects that by 2025 we will experience a ‘Minsky Moment’ – a sudden, major collapse of asset values when the market cannot maintain the pretence of stability. Despite rescue packages, the expectation is of a 25% loss of return for pensions and living standards over 30 years which then continue to fall.
The disastrous failed transition pathway
A Failed Transition, with emissions continuing to rise inexorably despite government rhetoric, would put us on track for an unimaginable 50% reduction of returns by 2060. The more gradual dip seen in the second half of this decade (on the infographic below, the y-axis representing the value of pension funds) accounts for the period when investors will start to realise that the laissez-faire transition to a low-carbon economy has been too slow to succeed and the steps downwards are rear-guard actions doomed to failure.
Notwithstanding arguments against society’s attachment to extractive ‘growth’, the IFoA warns that on the current trajectory: “After 2060, the physical impacts on GDP within the Failed Transition Pathway will overwhelm GDP growth… with a failed transition we will no longer be able to outrun destruction and the decline is locked in… the damage and disruption caused by climate change [will] overwhelm the capacity for productivity and innovation gains.”
In the Failed Transition pathway, the conservative projection is that at 50% there would occur a complete breakdown of societal cohesion: a breakdown that will be irreversible and exponential as we pass climate tipping points. The IFoA foresees chaos:
“Further non-linear impacts may be driven by multiple climate- change tipping points, which are not currently captured in IPCC estimates and are increasingly likely to be triggered as temperatures go past the 1.5°C level. These include the collapse of ice sheets in Greenland, West Antarctica and the Himalayas, permafrost melt, Amazon die back and halting major ocean current circulation. These tipping points may interact, triggering each other and cascading like dominoes. […] There are early indicators that we are now approaching some of these tipping points.”
A domino effect
And as with climate tipping points, the economic dominoes will fall. A lump sum pension depends on equity. If funds tank, pensions fail; those without pensions will sell houses; those without houses will become destitute; businesses will not be underwritten leading to mass unemployment; those out of work will not pay tax to fund state pensions; life expectancy will plummet. The result? Societal implosion.
The IFoA amplifies the alarm: “Insurance leaders have unequivocally stated that if climate change raises average temperatures to 4 ̊C above pre-industrial levels most assets will be uninsurable. Without insurance, investment, finance, business slow to a halt – we will no longer have an economy. Governments will no longer have a tax base from which to deliver vital services.”
It is sobering that the Committee on Climate Change, the Government’s own advisory body, has warned that 4 ̊C is our current trajectory if urgent action is not taken.
It is downright terrifying that the Chatham House Climate Risk Report warns: “Any relapse or stasis in emissions reduction policies could lead to a plausible worst case of 7°C of warming by the end of the century (10% chance).”
7°C is, of course, not survivable.
Joining the dots
The need to ‘join the dots’ between isolated events is recognised within the profession. Spencer described this domino effect as a “wicked problem”, a problem where there is no single solution. Because of complex interdependencies, the effort to solve one aspect of a wicked problem may reveal or create other problems.
In their paper Playing our Part: actuaries on a sustainable journey, Pryor along with former chair of the UK Actuarial Profession’s Sustainability Board Sandy Trust, speaking of government policy as much as actuarial methodology, concludes:
“This will require a mindset shift for us. We must consider not only the direct financial impacts of our decisions, but also the broader real-world impacts that could have long-term effects on customers, shareholders and wider society.
“We must consider the financial system not as separate from the wider Earth system, but as intricately linked to it. Money cannot put right the fundamental changes that climate change might bring after it is too late – but the financial world can help keep it from getting too late.”
They go on to say that current modelling does not sufficiently consider the broader environmental tipping points and knock-on effects of the Shared Socioeconomic Pathways [SSPs] explored in the IPCC’s 6th Assessment Report such as climate change related migration and conflicts, food-supply disruption (there is no point in a projection that only considers slightly worse weather in UK when the loss of global breadbaskets will overwhelm local implications), and other variables such as education, disparities in economic opportunity and progress in achieving sustainable development goals.
It is notable that this risk assessment includes the danger of a “resurgent nationalism”: what might be seen as a ‘Faragian’ political feedback loop.
One problem with this methodology is the reliance on past modelling to predict the future. Spencer explains: “Pension modelling looks to the next 30 years but can only base projections on historic models. Since climate has not been a factor before, even the dire predictions of the three pathways are wildly optimistic.” Spencer summed current thinking starkly: “If we do not change the economy, we head over a cliff.”
A message to the Government
From 2020 to 2021 the fossil fuel industries received an increase of £1bn support from the Government. For renewable energy in the same year, the total support for projects increased by a mere £1mn.
To ensure that investors feel secure switching to sustainable pension funds and are not left with stranded assets, the Government must be unambiguous in its intention to ban fossil fuel exploration and back renewable infrastructure through stimulating investment and planning overhaul.
The current lack of trust of the Government’s commitment is compounded by its instinct for deregulation, preferring instead a doctrine of ‘loose’ recommendation. This ‘business as usual’ friendly regime has been flagged by actuaries as a fundamental fault in the regulatory system that further dents investor confidence:
“The implications for markets and GDP should be noted by regulators and policymakers. Policymakers in particular should consider the long-term implications for economies that are projected to contract in a Failed Transition Pathway […] This implies a strong shift away from fossil fuels, and related physical and human capital, business models and supporting financial and regulatory infrastructure. Almost every sector in the economy will have to be retooled in order to shift away from fossil fuel dependency in a very short timeframe of one to two decades.”
Furthermore the Carbon Tracker report of July 2023 unequivocally “calls on all stakeholders, from governments, regulators, investment professionals, all the way to civil society groups and individuals, to ensure that climate change policy is based upon the work of scientists.”
And, of course scientists predict dire consequences from climate breakdown if fossil fuel extraction continues.
However, extraordinarily, even in the light of all this expertise, the Government continues to welcome policy input from the arch obstructors of the Tufton street cabal of science deniers and neoliberal ideologues, all of whom propagate the myth that ‘we cannot afford mitigation’ (ostensibly saying, ‘we can’t afford to survive’).
As Pryor says: “The Government tends to say things are too expensive when generally the opposite is true.” When ministers or vested interests baulk at the estimated $3.5 trillion spending per year globally, they need to be reminded that the estimates for the cost of unchecked climate change top out at $551 trillion, which is more money than there is on Earth at the moment.
If ever there was a story that would bring home the climate emergency to a complacent UK electorate, perhaps this is it.