The finance industry is facing a critical challenge as current climate models accuracy vs reality is revealed to be deeply flawed. A recent study by Britain’s Institute and Faculty of Actuaries, in collaboration with the University of Exeter, highlights that these models significantly understate the true pace of global warming, exposing financial institutions to far greater risks than previously acknowledged. This groundbreaking research urges a re-evaluation of how financial firms approach climate risk management.
Sandy Trust, lead author and director of sustainability risk at Baillie Gifford, warns that the reliance on these inadequate models means banks, insurers, and asset managers are accepting a “chance of failure” that is “a hundred times greater” than what they would tolerate for typical insurance company failures. The study critically questions the rigor applied to climate risk compared to other serious financial risks.
What is a climate solvency plan? A climate solvency plan is a proposed framework, akin to financial regulation, designed to protect economic growth by ensuring the planet’s long-term health. It involves emergency measures like halting deforestation and accelerating renewable energy, requiring governments and financial institutions to regularly assess the planet’s adaptive capacity.
A key finding of the study points to the declining levels of aerosol pollution, which have, until recently, inadvertently shielded the Earth from some of the sun’s rays. As this pollution decreases, it becomes increasingly evident that global temperatures are rising at a rate faster than what greenhouse gas emission levels alone would suggest, directly impacting the climate models accuracy vs reality narrative.
Furthermore, the research indicates that the impact of deforestation has been significantly underestimated in existing models. The study concludes that current greenhouse gas levels are already so high that even achieving net-zero emissions by 2050 is unlikely to limit warming to the crucial 1.5 degrees Celsius target, raising the specter of irreversible planetary damage.
Breaching the 1.5C threshold escalates the likelihood of hitting critical “tipping points,” where environmental damage, such as melting ice sheets, becomes entrenched and irreversible. Trust emphasizes that from an actuarial perspective, a 0.5% chance of breaching such a “solvency event” would be ideal, yet many carbon budgets offer only a 50% to two-thirds chance, a probability deemed unacceptably low. This stark contrast underscores the problem with current climate change projections 2026.
The study’s release coincides with several global setbacks in climate action. In the US, President Donald Trump previously withdrew the nation from international climate frameworks. Concurrently, the burgeoning demand for energy driven by artificial intelligence is contributing to higher emissions. In Europe, legislators concluded 2025 by agreeing to substantially scale back climate regulations, further complicating efforts to mitigate global warming.
Ignoring climate risk is already proving costly. A January paper from European Central Bank researchers revealed that banks with higher exposure to climate transition risks face increased borrowing costs. This tangible financial impact serves as a stark warning, reinforcing the actuaries’ call for a more robust approach to climate risk management for finance.
Researchers from the IFoA and University of Exeter advocate for a “planet solvency recovery plan,” mirroring established financial regulations, to safeguard economic growth. This comprehensive plan includes urgent actions such as stopping deforestation and accelerating renewable energy development, alongside a broader requirement for governments and financial institutions to routinely evaluate the planet’s resilience to human activities. This plan addresses how to measure climate risk in finance more effectively.
Trust reiterates the core message: “We have very well established risk management techniques and protocols to manage financial stability and solvency. We simply need to apply the same rigor, the same discipline to climate change.” This calls for a fundamental shift in how the financial sector views and integrates climate considerations into its operational frameworks, moving beyond the current flawed climate models accuracy vs reality.
The actuaries’ report serves as an urgent wake-up call, demanding that the financial industry confronts the stark reality that current climate models accuracy vs reality is insufficient. Adopting a rigorous, actuarial approach to climate risk is not merely an environmental imperative but a crucial step for safeguarding global financial stability and ensuring a sustainable economic future.
