Tipping points like the collapse of Greenland's ice sheet are not considered in economic models. © Peter Prokosch / GRID-Arendal
Economic models vastly underestimate the potential financial loss from climate change and the global economy could face a loss in GDP of at least 50% between 2070 and 2090 if nothing is done to curb emissions, a new report has found.
In a report with scientists from the University of Exeter, the Institute and Faculty of Actuaries (IFoA) called on political leaders to take more action to avoid what they call “planetary insolvency,” a climate disruption to the Earth’s systems so severe it would destabilise society.
Risk management experts at the IFoA criticised the economic models used by governments and financial institutions, which they say fail to take into account the real risks from climate change and nature loss. For example, they say economic models do not account for severe climate events like tipping points, irreversible changes such as coral reef loss, the Greenland ice sheet melting, and disruptions to the ocean’s currents.
“High-profile climate change assessments in wide use significantly underestimate risk as they exclude many of the most severe risks we could face. Yet it is these extremes that should drive policy decisions,” Tim Lenton, a climate researcher at the University of Exeter, said in the report.
In a situation where the world warms by 3°C or more by 2050, it would likely trigger multiple tipping points, causing over 4 billion deaths. This would lead to severe breakdown of ecosystems and potentially cause a state failure and loss of capital, the report found.
The world has already reached its hottest year on record, putting pressure on central banks and regulators to take action.
The report, which is the third joint climate risk study by the IFoA following papers on climate risk scenarios and a planetary solvency framework, suggests politicians and governments change how they tackle climate change issues. It suggests setting up an independent body on the UN security council that would make annual risk assessments and develop metrics to monitor Earth’s health.
“You can’t have an economy without a society, and a society needs somewhere to live,” said Sandy Trust, lead author of the report.
The authors propose a planetary solvency risk dashboard, which would provide information to support policymakers using what they call resilience principles, a set of guidelines for civilisation risk management.
This planetary solvency approach incorporates challenges to the Earth, as well as human society and the economy. The principles include using risk-led methodology, systemic risk assessments, educating stakeholders, collaboration across disciplines, and effective governance and reporting measures.
“Combining science and risk is important; science provides a deeper understanding of the issues faced, risk assesses the consequences and recommends actions to mitigate or avoid them,” wrote Lenton.
This page was last updated February 3, 2025
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
