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Michael Penn in Investment Innovation Institute (i3): ‘Climate Change Impact on Investments is Underestimated’

Ella Rathgeber

16th AUG. 2023

A recent article by i3, an Australian media group focused on the investment industry, explores Steven Keen’s argument of the significant underestimation of climate change impact on global economies. ASR’s Michael Penn provides valuable insights on how investors should incorporate and quantify climate risk.

It’s argued that this significant underestimation is due to problems with widely-used economic models that assess the impact of global warming on future GDP growth, with Keen saying that these models are incomplete and often ignore current climate science research.

Keen argues that a key issue of many integrated assessment models, for example the Dynamic Integrated Climate‐Economy (DICE) model, is that they don’t take ‘climate tipping points’ into account – the point at which the rise in temperature causes ecological processes to move to a different state or even collapse.

Michael Penn – Head of Climate Macro Strategy at ASR – thinks about tipping points in terms of what he calls a “Green Swan” event: a critical climate threshold which, once crossed, leads to large and irreversible damage. Penn sees a role for integrated assessment models like DICE as a starting point: “You cannot rely on it as the end point of the analysis, but let’s use them as a starting point”. 

“There is sometimes a bit of a gap between econometricians who will use these models to say: ‘[Climate Change affecting] 1 per cent of GDP feels reasonable’. And then you have a group of academics, who will say that this is so outside of human understanding that we can’t put numbers on it. It’s just the collapse of civilisation”.

“The problem is, if you’re a portfolio manager or an asset allocator, you can’t make a decision between 1 per cent of GDP or the collapse of human civilisation. You have to put some kind of number and distribution on it” Penn says.


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