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Climate risk assessment: banks use “unrealistic” models

Climate risk assessment

photoNicholas Cappello su Unsplash

Finance Watch Report Analyzes Tools to Assess Climate Risk

– Banks use “unrealistic” climate risk assessment models that make them unprepared for possible shocks caused by the climate crisis. The weakness lies in resorting to instruments that are constructed in a similar way to those already used to weigh financial risk. But in this way they do not take into account that climate change is not a linear and progressive process.

Central dynamics such as tipping points (tipping points) and positive feedback mechanisms are missing from this climate risk assessment. That is, those thresholds exceeded which trigger sudden accelerations and changes that feed themselves. According to a report by Finance Watch.

Flaws in Climate Risk Assessment

The economic risks of climate change are currently modeled in a similar way to traditional financial risks. But unlike the financial losses of the past, the losses resulting from climate change will be disruptive, unpredictable and permanent”, reads the document. Points of no return and feedback mechanisms, such as melting permafrost, the slowdown in southern Atlantic traffic and forest fires could accelerate losses to levels far above those resulting from recent financial crises“.

A recent study by the Potsdam PIK found that exceeding the threshold of 1.5 degrees – as we will most likely do this year, standing on the trajectory to break it stably since 2029 – increases the risk of triggering tipping points by 72%. The latest IPCC report published in 2021 assigned a very high criticality level to one of the tipping points, that of the melting of the permafrost, considering very likely that it can release large quantities of methane into the atmosphere (estimated between 3 and 41 Gt for each degree of temperature rise).

The central aspects of the methodologies of these economic models date back to the 1990s and still dominate political thought, often leading to absurd results,” the report continues, citing as examples climate scenarios in which, according to current science, at least 80% of tropical species would be at risk of extinction and some ecosystems could collapse, while according to these models the impact on the economy would be a decline in the value of assets less than 10%.

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