According to a new study by the Central Association of Actuaries of Great Britain, the finance industry is relying on climate models that underestimate the speed at which it increases.
The Institute and Faculty of Actuaries, which carried out its study in collaboration with scientists from the University of Exeter, say the research also shows that financial firms are not using the same rigor to deal with climate as they do with other serious risks.
Sandy Trust, lead author of the report and director of sustainability risk at Bailey Gifford, says the use of inadequate models within the finance industry has led to banks, insurance companies and asset managers accepting a “chance of failure” that is “hundred times greater than an insurance company’s chance of accepting failure.”
According to the study, most climate models currently fail to reflect the ongoing reduction in so-called aerosol pollution, which ironically has helped shield the Earth from the sun’s rays until now. The study notes that as aerosol pollution declines, it is increasingly clear that temperatures are rising faster than the level of greenhouse gas emissions.
The study, which also indicates that the impact of deforestation has been underestimated, concluded that greenhouse gas levels are already so high that even cutting net emissions to zero by 2050 would not limit warming to 1.5C. This raises the possibility of hitting so-called tipping points, beyond which planetary damage such as melting ice sheets can occur.
“If we project 1.5C as a solvency event, we only want a 0.5% chance of that solvency breach,” the trust said in an interview. Instead, “many carbon budgets provide only a 50% or two-thirds chance of limiting warming,” and “this is highly unlikely from a practical perspective.”
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The study’s findings come as climate science faces several setbacks. In the United States, President Donald Trump has cut the world’s largest economy out of the international framework intended to fight climate change. At the same time, the rise of artificial intelligence is increasing energy demand and driving higher emissions.
Meanwhile, in the European Union, lawmakers and member states ended 2025 with an agreement to dramatically scale back climate regulations.
There are already signs that ignoring climate risk comes at a financial cost. A January paper by European Central Bank researchers found that banks pay more to borrow if they have more exposure to climate change risks.
IFOA and the researchers behind the University of Exeter paper call for a “planetary solvency recovery plan” designed for financial regulation to protect economic growth. This includes emergency measures to stop deforestation and accelerate the development of renewable energy. More broadly, governments and financial institutions need to routinely assess how well the planet is adapting to human activity, he said.
“We have very well established risk management techniques and protocols to manage financial stability and solvency,” the trust said. “We need to apply the same rigour, the same discipline, to climate change.”
Photo: People wade through floodwaters in Parashuram, Fani, Bangladesh, in 2025. Photographer: Zakir Hasin Chowdhury/NorPhoto/Getty Images
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