The finance industry is relying on climate models that understate the speed at which temperatures are rising, according to a fresh study by Britain’s main association of actuaries.
The Institute and Faculty of Actuaries, which conducted its study together with scientists at the University of Exeter, says the research also shows that financial firms aren’t applying the same rigor to their handling of climate as they do to other serious risks.
Sandy Trust, the report’s lead author and director of sustainability risk at Baillie Gifford, says the use of inadequate models inside the finance industry has left banks, insurers and asset managers accepting a “chance of failure” that is a “hundred times greater than the chance we accept of insurance company failure.”
According to the study, most climate models currently fail to properly reflect ongoing reductions in so-called aerosol pollution, which has — ironically — so far helped shield the Earth from the sun’s rays. With aerosol pollution on the decline, it’s increasingly clear that temperatures are rising faster than would be implied by the level of greenhouse gas emissions, the study found.
The study, which also indicates that the impact of deforestation has been underestimated, concludes that the level of greenhouse gasses is already so high that even cutting net emissions to zero by 2050 won’t limit warming to 1.5C. That raises the likelihood of hitting so-called tipping points, beyond which damage to the planet such as melting ice sheets becomes entrenched.
“If we were to treat 1.5C as a solvency event, we would want only a 0.5% chance of breaching that solvency,” Trust said in an interview. Instead, “many carbon budgets only give a 50% or two-thirds chance of limiting warming,” and “that’s a very low probability from an actuarial perspective.”
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The study’s findings come as climate science suffers a number of setbacks. In the US, President Donald Trump has yanked the world’s largest economy out of international frameworks intended to fight climate change. At the same time, the rise of artificial intelligence is driving up demand for energy and fueling higher emissions.
In the European Union, meanwhile, 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 researchers at the European Central Bank found that banks pay more to borrow if they have a higher exposure to climate transition risks.
Researchers behind the IFoA and University of Exeter paper say a “planet solvency recovery plan” that’s modeled on financial regulation is needed to protect economic growth. That includes emergency measures to stop deforestation and to 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, they said.
“We have very well established risk management techniques and protocols to manage financial stability and solvency,” Trust said. “We simply need to apply the same rigor, the same discipline to climate change.”
Photograph: People wade through floodwaters in Parshuram, in Feni, Bangladesh, in 2025. Photographer: Zakir Hossain Chowdhury/NurPhoto/Getty Images
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