Climate Models Leave Finance Blind to Accelerating Global Warming

Financial institutions are relying on climate models that significantly understate the pace of global warming, according to a new study by Britain’s main actuarial body, raising concerns that banks, insurers and asset managers are misjudging one of the most material risks facing the global economy.

The Institute and Faculty of Actuaries, working with climate scientists at the University of Exeter, found that many financial firms are not applying the same standards of rigor to climate risk as they do to other threats that could undermine solvency or financial stability.

Sandy Trust, the study’s lead author and director of sustainability risk at Baillie Gifford, said the industry’s continued reliance on flawed climate assumptions means firms are implicitly accepting levels of failure that would be considered unacceptable elsewhere in finance.

He warned that current approaches tolerate a probability of collapse “a hundred times greater than the chance we accept of insurance company failure.”

At the heart of the problem, the study argues, is the widespread use of climate models that do not adequately account for declining aerosol pollution.

For decades, aerosols produced by industrial activity have partially masked global warming by reflecting sunlight away from the Earth.

As air quality improves and aerosol levels fall, that cooling effect is fading, allowing temperatures to rise faster than greenhouse gas levels alone would suggest.

The research also finds that the financial impacts of deforestation have been underestimated.

Together, these factors mean that existing climate models systematically downplay the speed and severity of warming already locked into the system. As a result, even if global net emissions fall to zero by 2050, the study concludes that limiting warming to 1.5 degrees Celsius is increasingly unlikely.

That failure would substantially increase the risk of crossing climate tipping points, such as irreversible ice sheet melt or large-scale ecosystem collapse.

From an actuarial perspective, Trust said, the probabilities embedded in many climate pathways would be unacceptable if applied to financial solvency.

“If we were to treat 1.5 degrees as a solvency event, we would want only a 0.5 percent chance of breaching that threshold,” he said.

Instead, many widely used carbon budgets allow a 50 percent or even two-thirds chance of failure, which he described as “a very low probability standard from an actuarial perspective.”

The findings come at a politically difficult moment for climate policy. In the United States, President Donald Trump has withdrawn the country from several international climate frameworks, weakening global coordination.

At the same time, the rapid expansion of artificial intelligence and data centers is driving up electricity demand and associated emissions.

In Europe, lawmakers ended 2025 by agreeing to scale back a range of climate regulations, citing competitiveness concerns and regulatory fatigue.

The study suggests such decisions risk compounding financial blind spots rather than reducing long-term exposure.

There are already indications that markets are beginning to price climate risk more aggressively.

Research published in January by economists at the European Central Bank found that banks with higher exposure to climate transition risks face higher borrowing costs, suggesting investors are increasingly sensitive to how institutions manage climate uncertainty.

The authors of the actuarial study argue that governments and financial institutions should adopt a “planet solvency recovery plan” modeled on financial regulation.

This would include emergency measures to halt deforestation, accelerate renewable energy deployment, and routinely assess whether the planet’s natural systems remain within safe operating limits.

Trust said the tools already exist. “We have very well-established risk management techniques and protocols to manage financial stability and solvency,” he said. “We simply need to apply the same rigor, the same discipline to climate change.”