The Positives and Negatives of Tipping Points  

A growing body of research warns that the financial sector is underestimating the risks of Earth’s system tipping points – how should it respond?  

The gap between the science of climate change and the emerging tools aimed at helping the financial sector manage concomitant risks is the subject of intensifying debate.  

Last July, ‘The Emperor’s New Climate Scenarios – a warning for the financial services’, published by the Institute and Faculty of Actuaries (IFoA) in collaboration with the University of Exeter, found a disconnect between climate science and the climate scenario modelling being developed for the financial sector.  

In the same month, financial think tank Carbon Tracker warned of a “huge disconnect” between what scientists expect from global warming, and what the financial sector has modelled, specifically UK pension funds. According to the study, UK pension funds use investment models based on economic research that predict global warming of 2°C to 4.3°C will have only a minimal impact on member portfolios. However, climate science finds such temperature rises could trigger dangerous tipping points and in the worst-case scenario represent an existential threat.  

A tipping point occurs when a small change sparks an often rapid and irreversible transformation. The effects can be positive or negative – such as crossing natural thresholds which could tip an Earth system into a different, irreversible state, potentially hostile to humanity.  

Derailment risk  

Last month, the University of Exeter released a major report assessing that the world was on a “dangerous trajectory” with regards to Earth’s system tipping points. It found with global warming on course to breach 1.5°C, at least five of Earth’s system tipping points are likely to be triggered – including the collapse of major ice sheets and widespread mortality of warm-water coral reefs.  

Speaking to ESG Investor, Professor Tim Lenton, an award-winning scientist and co-author of the report, says that with global warming already at 1.2°C, the world is close to passing the five tipping points. Lenton highlights tipping points that could manifest over decadal timescales at current levels of warming – the Atlantic Meridional Overturning Circulation (AMOC), the North Atlantic Subpolar Gyre (SPG) and the Antarctic Overturning Circulation – which may collapse under warmer conditions. 

“The last time it tipped, it strongly implicated a transition to the Little Ice Age in Europe,” Lenton explains, leading to harsher winters across the continent. “It could really hurt the UK disproportionally. So, we’ve been working with the Cabinet Office (UK government department) on trying to convey that to policy and security sectors. But it also has bearing for the financial sector.”   

The consequences for the finance sector, and wider economies of a series of crystallising compounding risks through tipping points, is what is termed derailment risk – where the transition to a low-carbon economy and climate change mitigation efforts would be hampered by resources needing to be devoted to climate change adaptation to deal with the consequences.  

The University of Exeter’s Global Tipping Points report considers how the financial sector can manage tipping cascades, such as use of systems thinking, and catalysing positive tipping points, also the subject of a November report from asset manager Aviva Investors authored by Tom Taylor, its Head of Climate Finance. 

Broadly, various actions to bolster the transition away from fossil fuels, such as policy and business engagement or low-carbon investing by a sufficiently large part of the financial system, could provide the nudge needed to cross tipping that could make the transition exponential, according to the Aviva report.

At a wider, global scale Aviva Investors believes climate transition planning – which the UK is set to mandate reporting on – across the whole global economy can provide a series of positive self-reinforcing actions and information flows. Signals from national plans can inform plans for regulators and supervisors of finance, and these help to shape transition plans from financial actors and the private sector, whose plans and dependencies in turn provide information about how plans across the system can iterate and develop over time, Aviva Investors says.

Lenton adds that the current trajectory for global warming means it can’t be left to incremental change. “Any credible pathway to a better future must find a trigger. What we call a positive tipping point – the ending of fossil fuel emissions in simple terms.”  

Real-world scenarios  

One large investor which is exploring the implications of tipping points for its investment portfolio is UK-based Universities Superannuation Scheme (USS). It is collaborating with the University of Exeter on this work, and in August, Innes McKeand, who heads USS’ Net Zero programme, told ESG Investor that it was reviewing how it conducted scenario modelling of climate change, so it didn’t miss tipping points.  

Current scenario models are typically long term. There is a danger climate risks that may affect financial returns seem to be happening gradually, but could in reality crystallise very suddenly at a tipping point. According to McKeand, USS is exploring shorter time horizons for its scenarios and factoring in other macro drivers alongside climate change. It has also co-released a report exploring thinking on “real-world scenarios” incorporating these factors and others.  

Commenting on the University of Exeter’s work with USS, Lenton says: “What we really need to see are decision-useful, climate scenarios that incorporate physical Earth tipping point risks in a credible way and also incorporate socio-economic positive tipping point opportunities in a credible way.” 

He acknowledges that there is “a lot more to do” with investment managers on mapping out the physical risk from the Earth’s tipping point systems and the climate, but says it is “an attackable problem”.  

Alongside re-thinking climate scenarios, global governance also needs a rethink to tackle the risk of triggering Earth’s system tipping points, says Lenton. “There is a lot to say also about how we can govern these systems and pinpoint risks because in simple terms, there’s no established governance of them or governance thinking of how we deal with them.” 

Recommendations with regards to governance in the Global Tipping Point report includes parties to the Paris Agreement committing to a discussion of tipping points in future Global Stocktake processes. The report also proposes assessing collective progress towards tipping point prevention and impact governance, and governance actors, including UN bodies, national governments and non-state actors, engaging in the process of coalition building and agenda setting for the governance of the Earth’s system tipping points.  

Governance is also key to helping the financial sector tackle tipping points risks, according to Mike Clark, an actuary and Founder of consultancy Ario Advisory. Pension trustees need to start asking questions of their investment consultants and asset managers on tipping point risks, he argues.  

This could include asking an investment consultant to consider tipping points through the ‘precautionary principle’. This was defined in the 1992 Rio Declaration as not postponing cost-effective measures to prevent environmental degradation, despite lack of full scientific certainty, where there are serious threats of irreversible damage. It also could mean a trustee asking their asset manager to explain what they are doing about tipping points in a climate transition plan.  

Last August, the UK’s The Pensions Regulator’s Climate and Sustainability Lead, Mark Hill, said it was “essential” that trustees feel confident to question and challenge their advisors and the output of climate scenario analysis, including how tipping points and other non-linear changes are accounted for.  

Systems change  

Systems-level thinking, be it through investing or stewardship, is also seen as an avenue for the financial sector to tackle negative tipping point risks and bolster positive tipping point opportunities. In practice, Lenton explains this could mean an investment manager investing coherently across a supply chain, where one investment interacts with another investment to catalyse a positive tipping point.  

To grow the electric vehicle market for example, this could mean investing in necessary elements across its supply chain, such as grid connection or battery storage.   

Sara Murphy, Chief Strategy Officer at The Shareholder Commons (TSC), which has been filing shareholder proposals on systemic risk since 2020, says tipping point considerations are embedded in systems stewardship through its focus on preventing the crystallisation of systemic issues such as climate change or antimicrobial resistance.  According to a new book by PRI’s former Head of Policy Will Martindale, systems stewardship is a growing trend by institutional investors. 

“Our entire proposition is that the most important thing for investors to focus on is the 90% store of value in their diversified portfolios that arises from a healthy economy that itself depends on thriving systems, as opposed to the way most stewardship is conducted today, which is entirely around idiosyncratic risk,” Murphy explains.  

Frank Dixon, former Head of ESG research at data house Innovest which was acquired by MSCI in 2009, says he realised investing could be used to drive systems change during his time developing models that were later used at MSCI: “I developed their models and saw after a while that no company had any hope of fully mitigating their impacts – they could only get about 20% mitigation before they violated their obligation to maximise shareholder return,” he explains.  

This led him to the realisation that systems change was at least 80% of the solution to achieving the UN Sustainable Development Goals.  

On preventing negative tipping points, Dixon argues that a central element is understanding what they are and why the Earth is coming close to them. “What do we do about it, is that we have to evolve our economic and political systems into forms that align with the laws of nature.”  

He is under no illusion that this shift in mindset will be easy, acknowledging that “high complexity is a main barrier to system change”.  

But he is working on practical solutions in the form of “system level scores” for companies underpinned by several years of research and books developing his theory of Global Systems Change.  

Metrics that could be used for scoring include whether a food company like Unilever was collaborating around food issues or high-level system change for all companies would be working with government and others to evolve economic and political systems.   

“When we give companies scores on system change performance of assets, that more than anything else is going to incentivise them,” he argues.  





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