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

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(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.

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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.

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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.

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“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. 

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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.

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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.

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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. 

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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.

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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.