What caught our eye this week

Here are three stories that we found particularly interesting this week and why. We also give our lateral thought on each one.

• Are investors using the wrong models?
• Do indices actually contribute to decarbonisation?
• The chicken and egg of green steel.

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Are investors using the wrong models?

What mid term scenario about our environment do you use in thinking about your investments? If you are like most investors, you use one of the available economic models. Are they really consistent with the science? What if they are massively under estimating the risks to your investment portfolios?

Recent research from the University of Exeter and the Institute and Faculty of Actuaries suggests that many investors are using models that are totally inconsistent with the known (and agreed) science. So, what is the problem?

Some economists have predicted that damages from global warming will be as low as 2% of global economic production for a 3°C rise in global average surface temperature. Such low estimates of economic damages – combined with assumptions that human economic productivity will be an order of magnitude higher than today – contrast strongly with predictions made by scientists of significantly reduced human habitability from climate change.

How can we have such a massive difference? The answer is ‘easy’. Economists seem to argue that the future will look like the past, which leads them to what is known as a quadratic relationship - greater warming leads to more economic damage, but at a steady non-accelerating relationship. This is the lower yellow line in the chart below: