Recalibrating Climate Risk: Aligning Damage Functions with Scientific Understanding

This comprehensive report from the Carbon Tracker Initiative can help you to better understand how economic models used by governments, central banks, and investors may be understating climate risks as the world moves towards 2° C. The report explains that physical climate damages are structural and compounding; that higher levels of warming are more likely to contribute to a cascade across sectors and geographies and undermine the conditions that economies rely on for stable growth; that real-world losses are shaped by local and regional extremes (such as heatwaves, floods, droughts) that can be poorly captured by models focused on global average temperature; and how many risk assessment approaches still link damages to global mean temperature, even though disruption is often driven by local and regional extremes. The report is divided into four sections that explain the disconnect between climate science and economics; the problems with current damage functions; ways of improving damage functions to better reflect real-world processes; and provide recommendations to improve damage modelling, as well as for financial regulators, supervisors, institutional investors, and pension funds. This report will be especially helpful for sustainability and risk professionals.