A Climate-Related Financial Risk Boondoggle

Bad Methods and Conflicts of Interest in the Attempt to “Green” Finance

By Jessica Weinkle

Over the past month, the Network for Greening the Financial System (NGFS), has come under serious criticism for implementing modeling methods that are meaningless—and quite so, even in the broader context of increasingly meaningless climate change risk calculations. The situation entails a bad statistical analysis, economic results for the whole world that are highly sensitive to questionable GDP data from Uzbekistan (that’s right, Uzbekistan), and the elite scientific journal Nature which resisted reviewer warnings that something didn’t seem right with the analysis. At stake is monetary policy all over the world.

The scandal enveloping NGFS and Nature is telling of the pressure that special interests have put on science for the purpose of advocacy. It is also telling of the willingness of the editorial team at Nature to kowtow to the catastrophism narrative that captured climate change research.

The corruption of science reflects a corruption of the democratic process. In an effort to circumvent democratic process of decision making for energy and industrial policy—a process deemed too frustrating by climate hardliners—advocates have created a complex and vast NGO financial regulatory regime that can effectively steer governments and financial institutions to act on dubious climate information to curb fossil fuel use, cut emissions regardless of the consequences, and increase the cost of living in the name of avoiding ecological collapse.

Selling the tools to meet these regulations and discipline the financial system has become big business, too. And some of the authors of the climate catastrophe narrative have been reaping its rewards.

Current NGFS Scandal

The NGFS is a coalition of central banks, regulators, and financial institutions who are working to guide financial institutions towards meeting the goals of the Paris agreement by developing best practices of “environment and climate risk management” in the financial sector. The most prominent work product of NGFS are its climate scenarios “developed primarily for risk assessment purposes, their focus being the assessment of impacts on the economy and on the financial sector over long time horizons.”

The fifth and most recent scenario version received a new damage function—that is, a calculation of the relationship between climate variables and economic output—which dramatically increased expected economic losses from climate change. Documentation for the new NGFS damage function appeared in “The economic commitment of climate change,” an April 2024 Nature paper by Maximilian Kotz, Anders Levermann, and Leonie Wenz, each affiliated with the Potsdam Institute for Climate Impact Research (PIK).

At this point, the original Kotz et al. paper has been thoroughly debunked for faulty statistics and data anomalies. But a bizarre series of events leaves Nature actively shielding the distorted methodology, NGFS, and PIK, despite the clear inaccuracies.

But this is only the latest round of open and valid critique of the NGFS scenarios. In 2021 and 2022, Roger Pielke, Jr. pointed out that NGFS was using an extreme and outdated emission scenario in their damage function. Over the same period of time, NGFS updated their model version to reduce the cumulative emission projections while increasing expected damages—an update that makes little scientific or economic sense.

Pielke notes that this is a curious feat because the different model versions relied on the same damage function developed in a paper by Matthias Kalkuhl and Leonie Wenz at PIK, which already produces extreme losses when compared to other published damage functions. However, NGFS clearly has a track record of pursuing unusually high damage values in questionable ways.

Of course, the latest controversy around the NGFS damage function created by Kotz et al. also uses the outdated emissions scenario that Pielke pointed out in earlier versions. This means that not only is the statistical process of the damage function invalid, the emissions scenario it relies on is fundamentally rooted in irrelevant and incoherent socio-economic assumptions.

Nature is clearly aware of the problems in the reliability of the methods and data of the paper but is reluctant to issue a retraction. Instead, Nature has maintained a user warning on the paper for over a year while awaiting “appropriate editorial action.”

Rigid

The primary funders of a progressive faction that has failed for 30 years to gain traction on energy policy through democratic process—because their demands are alienating and impractical, if not impossible—have forced their agenda onto the financial system.

This is more than politics as usual; this is a system of special interests that creates a rigid structure so strong as to capture the global financial regulatory system and weaken the scientific integrity of climate research all over the world. Consider that banking capital requirements and the potential for penalties for inadequate climate risk management across Europe now hinge on a single editorial decision at Nature.

Kotz et al. list their funding from PIK, but it is the pass through philanthropy, ClimateWorks, that gave PIK money for the NGFS scenario update.

The relationship between NGFS, ClimateWorks, and PIK researchers is not minor.

The NGFS is a direct offshoot of the Task Force on Climate-related Financial Disclosures (TCFD) created by Mark Carney, who is now Prime Minister of Canada. Carney put Michael Bloomberg as head of TCFD. Then, Carney co-founded NGFS which set itself up to carry out TCFD recommendations. Bloomberg Philanthropies and ClimateWorks funded development of the NGFS scenarios since the beginning.

Eventually, TCFD recommendations became enshrined into financial disclosure regulations in Europe and are being considered as a regulatory tool in the UK. California will require climate risk disclosures under TCFD recommendations beginning next year. For a hot minute, TCFD and NGFS started to work their way into the US Federal Reserve and corporate disclosure regulations. Formal adoption of TCFD recommendations into international accounting practices was a process that Bloomberg helped usher along.

Elsewhere, the Gordon and Betty Moore Foundation funds the INSPIRE program hosted by ClimateWorks and Grantham Research Institute. INSPIRE, is a “designated stakeholder” of NGFS and promotes green finance through research grantmaking; one-third of their commissioned projects have “buy-in from central bankers.”

All the while, Bloomberg Philanthropies has an advisory seat at ClimateWorks. And ClimateWorks has a seat on the advisory council of the IAM Consortium, a little known research community that organizes scenario development for the Intergovernmental Panel on Climate Change (IPCC). Researchers with important roles producing scenarios for use in IPCC reports are also creating scenarios for NGFS and other financial interests.

Conflicts of interest

The persistent problems with the NGFS scenarios reek of severe researcher conflicts of interest (COI) and funding bias. It is well established that research outcomes are correlated with researcher COI and the interests of the research sponsor. The reasons for the correlation are complex and not necessarily nefarious, but, at times, it does indeed include outright manipulation of data and methods.

Most notably since the Paris Agreement, climate change research became increasingly entwined- not just with energy and politics, but with finance and strategic litigation. These are major interests and the philanthropic money behind climate advocacy has some of the deepest pockets and political influence. Acknowledging this development as a source of COI for researchers and their institutions with the potential to corrupt the field has lagged behind the extent to which these industries have come to rely on these researchers.

A few years ago, Ben Caldecott, Director of the Oxford Sustainable Finance Group shared in the Financial Times that financial firms were placing pressure on researchers to produce and report select findings. Caldecott wrote,

I have also heard too many stories, often from early career researchers at a range of institutions, of instances where financial institutions and ESG data providers have sought to undermine academic freedom. They have done this by trying to change the results of research before publication, or have attempted to prevent it from being published at all, to protect their products and services.

This situation is not uncommon in other industry-academic research partnerships and everyone is sensitive to when they occur in fields such as industrial chemicals, or fossil and nuclear energy. But, climate change and finance? Pfft.

Looking at the organization of funders, research institutions, and financial incentive shows multiple cells of self-serving research programs. Consider this recent example:

• In 2022, investor John Doerr gave $1 billion to Stanford University to create the Doerr School of Sustainability.

• Doerr and Al Gore are both advisors to the venture capital firm Kleiner Perkins, for which they formerly worked.

• Doerr is an adviser to Watershed, an emissions accounting and sustainability reporting platform that conveniently sells carbon credits; Gore is an investor in Watershed. Kleiner Perkins is an investor in Watershed.

• Watershed is further advised by “key architects” of the climate-related financial risk regulatory regime including those previously involved with Bloomberg, ClimateWorks, and NGFS.

• Recently, the EPA announced it would no longer update a database on emissions from goods and services. The emissions database developer left the EPA to join the Doerr school working on a program supported by Watershed and another partner.

• The new emissions program is expected to be used by “thousands of organizations worldwide to measure and report their emissions” to meet the reporting requirements created by the architects of the regulatory regime

Stanford is now the curator of emissions data for meeting financial regulatory requirements including those of central banks under NGFS—emissions data that is central to the business interests of its largest donor and his colleagues. There are tremendous political and financial stakes tied to this entire institutional regime and any research that comes out of it. The institutional and researcher COI potential is through the roof.

There are several concentrated academic research hubs generating analytical products in support of climate litigation. They are connected in their activities and funders. Let’s look at a snippet.

• The Grantham Research Institute (GRI) at London School of Economics, which hosts the NGFS-focused platform, INSPIRE, receives funding from Bezos Earth Fund and ClimateWorks.

• Bezos Earth Fund supports World Weather Attribution—a leading entity in attribution products for litigation.

• Co-Founder of INSPIRE, Nick Robins, is a board member to the Carbon Tracker Initiative which studies impacts of the energy transition on the value of fossil-fuel exposed companies; it is a longtime pioneer of the stranded asset concept. The President of Carbon Tracker Initiative, Ilmi Granoff, advises on climate litigation at Columbia University at the Sabine Center which receives funding from ClimateWorks

• NGFS advises central banks to consider climate litigation impacts on asset valuation as part of their risk management

• Researchers at GRI shows that climate litigation decreases firm asset values and a ClimateWorks funded initiative at GRI argues that banks need to improve their management of exposure to climate litigation

• Bezos Earth Fund sits next to ClimateWorks on the advisory council of the IAM Consortium, that little known research group organizing scenario development for the IPCC, and as it happens, the Sixth Assessment Report discussed climate litigation and firm asset valuation at length in the context of mitigation in the Working Group III report

This is a closed circle of funders and actors that fuel climate litigation to depress asset values to effect financial risk management decisions. They do this to negatively impact the business sustainability of the oil and gas industry so as to force a global socio-economic transition to technologies and methods in which the cabal of funders are invested. Any research that comes out of this regime should be considered within its high financial and political conflicts. It should be closely scrutinized.

Europe, cancelled

In biomedical research, COI may lead to patient death. What happens in climate change research?

In a post for Breakthrough about a year ago, I explained that the NGFS scenarios had adopted the narrative of the Planetary Boundaries. The framework, which orients the entire research program at PIK, is explicitly a ‘limits to growth’ construct that pursues deindustrialization as ecological salvation. In this context, economic transformation is akin to the Second Coming upon which we will all be saved from capitalistic exploitation.

NGFS has considerable influence, particularly among European banks. Though it serves as a platform for regulators to develop tools and share ideas, NGFS is a hub of defective regulation. As one banking analyst put it:

Essentially, central banks and other regulators create the climate methodologies they use for bank supervision, but they present them through the NGFS.

The European Central Bank (ECB), which has a supervisory role over the central banks of the European Union, uses NGFS scenarios to stress test the Euro financial system. It has, in turn, integrated climate change assumptions into its monetary policies and “tilts” its investments towards issuers with “better climate performance.” ECB leans on the authority of NGFS to recommend other euro banks use climate scenarios in stress testing and disclosures.

One of the leaders in the technical critique of the Kotz et al. damage function was Greg Hopper of the Banking Policy Institute. Hopper recently asked if banks followed up with Nature or Kotz et al. after it was publicly revealed that there was a problem with damage function. If not, “[a]re regulators putting their thumb on the scale” to achieve their preferred outcomes? Hopper writes,

Going forward, these extreme economic assumptions in the scenarios would be used in climate stress tests of banks, practically ensuring that those tests will conclude that all global banks face material climate risks that would require higher capital levels.

Higher banking capital levels can constrain economic growth. But, under a planetary boundaries framework economic growth is not the goal; “genuine green growth” is the goal.

Germany, the industrial powerhouse of Europe, has experienced an overall industrial decline attributed to high energy costs associated with their poorly designed Energiewende transition to renewables from nuclear and other technologies. Germany’s policies have slowed its economic growth and has lent to a resurgence of German far-right politics. To boot, Germany now has higher carbon emissions per unit of GDP than the United States. Europe’s sluggish economy in recent years, headlined by Germany, may not be wholly attributable to these NGFS guided maneuvers. But it is consistent with the NGFS ethos of deindustrialization and degrowth.

The problem is that the progressive wealthy elite are circumventing democratic decision processes to achieve their ideals through the financial system in the name of a crisis they themselves spin in the media using research they fund. There is virtually no consideration for the system of conflicts of interest that’s been created by this scheme.

This is so much the case that researchers actively flaunt their shaping of the financial system and pursuit of litigation as a raison d'être for their modeling projects. Universities actively flaunt their involvement in this mess and allow entire institutes to be set up within their walls to advance a narrative of crisis everywhere—from hospitals to classrooms—that is rooted in a framework of absolute nonsense. Nature, one of the most prestigious scientific journals in the world, has turned itself into a doormat.

The outcome of this conflicted techno-authoritarianism lipsticked in green is economic decline, geopolitical instability, and a loss of scientific integrity.