On Climate | Agorika

Your Climate Risk Models Are A Joke

Let's be clear about something right from the start. The entire ESG industrial complex, with its glossy reports and self-congratulatory press releases, is fundamentally an exercise in liability management, not risk management. It’s a beautifully crafted illusion, designed to make fiduciaries feel prudent while they steer their clients’ capital directly into the path of a category five hurricane.

They’ve created a whole lexicon of nonsense to obscure a simple, terrifying truth: the financial models being used by some of the biggest players on Wall Street are fundamentally, catastrophically unequipped to price the single greatest systemic risk of our time. They are, to put it mildly, a joke.

And while most of the industry is busy patting itself on the back for incrementally reducing a few backward-looking metrics, the real, forward-looking risks are compounding, unpriced, just over the horizon. This isn't about saving the planet. This is about saving your ass from the inevitable, brutal repricing of reality.

A Tale of Two Brains: One Looking Forward, One Driving Via The Rearview Mirror

To understand just how deep the delusion runs, you only need to look at the difference between how Barclays and J.P. Morgan are framing this problem. It’s a case study in the difference between genuine risk analysis and performative box-ticking.

Barclays, to its credit, at least acknowledges that the future might not look like the past. Their framework is built on a simple, terrifying admission of epistemic uncertainty—the idea that we are dealing with inherent limits to our knowledge about a complex, dynamic system. They use phrases like “tipping points” and “feedback loops”, which is banker-speak for “we understand that shit can, and will, go sideways in ways the models can’t predict.”

They’re running a Climate Value-at-Risk (CVaR) model, which is a fancy way of trying to put a dollar value on future pain. And the numbers are staggering.

In a 1.5°C “Disorderly” transition—where politicians drag their feet and then panic—they model a -10.1% hit to Assets Under Management (AUM).
Even in a managed, 2°C “Orderly” transition, they’re still staring down a -3.7% loss.

This is the kind of analysis an adult does. It translates abstract scenarios into concrete financial terms that matter: % VaR. It shows you that even a "successful" transition is loaded with immense risk, and that a huge amount of physical damage is already baked into the cake, no matter what we do.

Now, let's look at J.P. Morgan, shall we?

Their big idea is “ESG integration”. Their keynote metric is the Weighted Average Carbon Intensity (WACI), and they’re very proud that it’s gone down from 184 to 110.

So what?

This is, without a doubt, one of the most useless, misleading metrics a firm could possibly champion. A declining WACI is a lagging indicator. It tells you about the carbon efficiency of your current portfolio based on past emissions. It tells you absolutely nothing about your portfolio’s resilience to future shocks.

Let me spell this out. You could have a portfolio with a WACI of zero, composed entirely of tech and healthcare companies. If their data centers, supply chains, and corporate headquarters are all located in Miami, Houston, and Southern California, you are massively, catastrophically exposed to physical risk. Your WACI score isn’t going to stop the servers from flooding or the power grid from failing.

J.P. Morgan is conflating a reduction in their portfolio’s contribution to the problem with a reduction in its vulnerability to it. For a fiduciary, whose primary job is to assess vulnerability, this isn’t just an analytical gap. It’s gross negligence. Barclays is building a framework to navigate “unknown unknowns,” while J.P. Morgan is refining a process to manage “known unknowns". In this environment, that is a losing strategy.

The Black Swans Are Circling

But the linear models are only the beginning of the problem. The real danger lies in what the standard risk frameworks completely ignore: climate tipping points.

These are critical thresholds where environmental systems go into irreversible, self-reinforcing death spirals. Think of the collapse of the West Antarctic Ice Sheet or a shutdown of the Atlantic Ocean’s circulation. These aren't just topics for science documentaries; they are sources of immense, correlated financial risk that render traditional diversification strategies utterly useless.

Crossing one of these thresholds would trigger cascading failures across insurance, agriculture, energy, and infrastructure simultaneously. It’s like managing portfolio credit risk without ever considering the possibility of a systemic financial crisis where all default correlations go to one.

Don’t believe me? The quants who actually study this found that baking just eight known tipping points into economic models increases the Social Cost of Carbon by about 25%. And because this is a world of fat tails, they found a 10% chance that tipping points could more than double the cost.

This is the catastrophic tail risk that J.P. Morgan’s WACI-centric view is completely blind to. Barclays, by at least building the language of tipping points into its framework, is demonstrating a level of sophistication that is terrifyingly absent elsewhere. Ignoring this is not a methodological discrepancy; it is a profound failure of fiduciary duty.

And Then The People Show Up

If you think this is all just about assets and infrastructure, you’ve missed the biggest variable of all: people. The demographic shocks that are coming are going to be a massive amplifier of economic instability.

The World Bank is projecting over 140 million internal climate migrants by 2050 in just three developing regions. That’s not a rounding error. That’s a labor market shock that hollows out entire regions while simultaneously overwhelming the infrastructure of the cities they flee to.

And it gets worse. This migration is demographically skewed. It’s the young, working-age adults who are most likely to move, leaving behind an older, more dependent, and more vulnerable population. This accelerates an aging crisis in climate-vulnerable areas, stranding not just physical assets but human capital.

Add to this the public health crises. The WHO is projecting 250,000 additional deaths per year between 2030 and 2050 from things like malnutrition, malaria, and heat stress. This is a direct erosion of human capital. It lowers worker productivity and diverts capital from productive investment into remedial healthcare spending. It’s a persistent tax on economic growth that your models are ignoring.

Stop Lying To Yourselves

So where does this leave us?

It leaves us with an industry fixated on rearview mirrors while driving toward a cliff. Relying on historical carbon data to manage future climate risk is no longer a defensible position for any serious fiduciary.

The path forward requires a brutal dose of reality. It means adopting sophisticated, forward-looking tools like CVaR that stress-test portfolios against plausible but severe outcomes. The failure to do this isn’t just bad analysis; it’s a failure to manage a material, foreseeable, and potentially catastrophic risk.

The cost of inaction is now demonstrably greater than the cost of action. But the real opportunity here, for those of us not drinking the ESG Kool-Aid, is in the mispricing. The market is full of fiduciaries who have chosen the illusion of safety over the hard work of actual risk analysis. They are creating one of the greatest alpha opportunities of our lifetime.

The task ahead is not to pretend the risks don't exist. It’s to develop the foresight to price them correctly while everyone else is still admiring their useless WACI score.