Norway’s $2.2 Trillion Wealth Fund Weighs In on Retracted Report

Back in December, the retraction of a key climate report was seen as proof that the economic cost of global warming had been overstated. Now, Norway’s wealth fund says its own analysis indicates that would be the wrong conclusion to draw.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Back in December, the retraction of a key climate report was seen as proof that the economic cost of global warming had been overstated. Now, Norway’s wealth fund says its own analysis indicates that would be the wrong conclusion to draw.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.Scientists from the Potsdam Institute for Climate Impact Research last year took down a paper that had fed into scenarios used by central banks and investors, including Norway’s $2.2 trillion wealth fund. The retraction followed criticism from scientists and academics of the paper’s methodology, and a formal review ultimately led the paper’s authors to acknowledge “substantial” issues.But in Oslo, a team at Norges Bank Investment Management decided to dig further. As part of an ongoing analysis into the potential for climate change to result in portfolio losses, NBIM studied the review of the retracted paper as well as the criticisms of its methodology to arrive at its own assessment.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.“At the end of this process, we still believe models tend to underestimate physical risk,” NBIM said in an email to Bloomberg, referring to the real-world fallout of rising temperatures. The comments come as Wall Street pays less attention to climate risk, with AI disruptions, inflation and war all seen as more pressing issues than the threat of rising temperatures. For insurers and pension funds, meanwhile, the fallout of a hotter planet is proving increasingly hard to ignore.The Oslo-based wealth fund said last year that most scenarios available to investors still “severely underestimate” the physical impacts of climate change. Unless global greenhouse gas emissions peak very soon and then fall significantly, the economic costs associated with physical climate risks will accelerate, with potential tipping points threatening to make outcomes even worse, NBIM said.There’s growing evidence that the financial cost of climate change is rising.

The European Environment Agency estimates that economic losses tied to global warming reached €208 billion ($245 billion) in the European Union between 2021 and 2024. That’s 24 times greater than estimated climate losses in the 1980s and more than 10 times the level of the 2010-2019 period, the data show. The economic cost of a hotter planet is also altering the way in which some corners of the financial markets operate. In insurance and reinsurance, for example, an ever greater share of risk is being transferred to capital markets in the form of catastrophe bonds. That’s coincided with the annual cost of natural disasters regularly exceeding the historical norm.And studies by the European Central Bank and the Central Bank of Ireland have found that debt markets are increasingly charging issuers more based on their perceived ability to transition to a low-carbon economy. There’s also evidence that private market investors are increasingly alert to such risks. Last year, Apollo Global Management Inc. told Bloomberg it was building out its risk review process to reflect the impact on asset valuations of extreme weather.At the same time, large parts of the finance industry have toned down their commitment to aligning their operations with the goal of limiting global warming to 1.5C. In the US, climate policies and regulations have been summarily shredded. In Europe, such measures are continually being walked back in the name of competitiveness.After the paper’s retraction, Johan Rockström, director of the Potsdam Institute, praised the authors for engaging with criticism of their work, and said “the broader body of evidence remains clear: Climate change, including extreme events like wildfires, hurricanes and floods, poses significant and growing economic risks across the globe.”The Potsdam paper provided the so-called damage function that is used by the Network for Greening the Financial System, whose models are widely followed. At NBIM, NGFS’s scenarios were the basis on which it last year estimated that the value of its US equity portfolio would drop by almost 20% in a world in which climate policies have stalled.After the Potsdam paper drew criticism, NBIM also started using alternative approaches to estimate climate impacts, a subject on which it plans to provide further details this week, according to a spokesperson for the fund.BloombergNEF and Bloomberg Economics said in a joint paper last month that physical-risk damage functions are typically estimated from historical relationships and “may under-represent non-market impacts, distributional effects, adaptation dynamics, compounding risks, and low-probability/high-impact outcomes,” including so-called tipping points. Economic estimates of damages from climate change “vary a lot, and there is wide uncertainty,” with “uncertainty widening at higher temperatures,” the report also found.Nicolai Tangen, the chief executive of NBIM, said in October that the fund’s long-term returns “depend on how the global economy manages physical climate risk and the energy transition.” The global economy “cannot outrun climate change, so neither can our investments,” he said then.The Potsdam authors will submit a new version of the paper for peer-review. Norway’s wealth fund is due to publish its 2025 sustainability report on Feb. 26. Its full annual report is due the following day.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.