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At COP21 in December 2015, governments committed under the Paris Agreement to strengthen the global response to climate change, by limiting the global temperature rise to well below 2°C above pre-industrial levels and to pursue efforts to limit it to 1.5°C.
Global warming had already reached ~1.00°C above pre-industrial levels in 2015. A linear extrapolation from temperature records previously projected that the 1.5°C threshold would be reached by March 2045 according to Copernicus.1 We have been reminded however that the past is not always a good indication of what to expect in the future, as updating with the same method and more recent data now suggests the timeline is materially shorter, and the threshold could be reached in 2029.
Would saving the climate mean that we would sacrifice the economy?
2025 was noted as one of the warmest years on record (despite cooling from a La Niña episode) according to the WMO (World Meteorological Organisation).2 Climate change increases the likelihood and magnitude of extreme weather events, and changes the long-term expectations for temperature and humidity. The pragmatic effect on human day to day lives for what it means for access to nature, food, transportation and services is difficult to extrapolate well without risking a severe underestimation of those effects. And indeed, climate scientists have sounded the alarm these past few years to signal the potentially catastrophic consequences if the efforts to stall climate change are not sufficient.3 4 5 6 Despite these calls to action, the pace of change to meet the Paris Agreement remains insufficient. Fossil fuels, especially oil, have historically been vectors of economic growth; the future role of fossil fuels is intimately linked with the reduction of greenhouse gas emissions and hence our ability to meet the Paris Agreement objective. Would saving the climate mean that we would sacrifice the economy?
The investments needed to enable a transition to net zero are estimated to require USD 4.8 trillion per year for a decade (about 50% more than it is today), and this is only for the investments in the energy sector (according to the IEA (International Energy Agency).7 Other major GHG-emitting sectors will also need to invest in their infrastructure and research. In addition, investments made for producing fossil fuels that will need to be retired before their planned end of life may crystallise losses for investors who endorsed those projects. For these reasons, public and private investments may view these costs as politically and economically unacceptable, ultimately affecting consumers’ and citizens’ day to day life.
Going back to the opening question, we are going to use a proxy: investment management as a sector often has exposure to most/all sectors, across most jurisdictions. Determining the impact of climate risk on the value of investments is a complex feat: we have to consider future world states (as plausible and challenging scenarios) and quantitative tools to model and calculate the impact of the assumptions related to the scenarios on the investment portfolio. The scenarios are often mapped to archetype scenarios from the IPCC (Intergovernmental Panel on Climate Change) for the physical and socio-economic aspects of the pathways and from the NGFS (Network for Greening the Financial System) incorporating fiscal policy and other macroeconomic outcomes in their assumptions. Quantitative analysis of the investment portfolios is done with specialised metrics such as the Climate Value at Risk (CVaR), using the scenario data to calculate the impacts; however, it is worth noting that most models do not take into account the non-linearity of climate risks, usually associated to tipping points.8
Tipping points are represented in more sophisticated models and show the amplitude of their effect on expected returns. For instance, Ortec’s climate scenarios9 cover a net zero by 2050 with a financial crisis in the short term, a delayed transition with a global warming of 1.9°C and a high warming scenario with a global warming of 3.7°C. The average impact on investment returns for 30 Australian superannuation funds (investment return impacted by a loss of 38% in a high warming world scenario by 2050) as well as the impact on inflation from climate change (a projected increase of 0.7% of inflation from climate change in 2050) create a dual headwind for retirees, who will see their purchasing power falling significantly in the case of a high warming scenario by 2050.
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Image source: Ortec Finance
The parallel to the Standford Marshmallow experiment, (where children are tested on the development of delayed gratification and self-control) is clear: while maintaining Business as Usual seems desirable in the short term (as the impact on returns may be the highest), a successful transition yields a better outcome in the net zero scenario than the high warming scenario. In a nice twist, it appears that saving the climate and saving future money are very much aligned – and to save them well, action is needed now: transitioning to net zero is not a nice to have, it is self-preservation.
At COP21 in December 2015, governments committed under the Paris Agreement to strengthen the global response to climate change, by limiting the global temperature rise to well below 2°C above pre-industrial levels and to pursue efforts to limit it to 1.5°C.
Global warming had already reached ~1.00°C above pre-industrial levels in 2015. A linear extrapolation from temperature records previously projected that the 1.5°C threshold would be reached by March 2045 according to Copernicus.1 We have been reminded however that the past is not always a good indication of what to expect in the future, as updating with the same method and more recent data now suggests the timeline is materially shorter, and the threshold could be reached in 2029.
Would saving the climate mean that we would sacrifice the economy?
2025 was noted as one of the warmest years on record (despite cooling from a La Niña episode) according to the WMO (World Meteorological Organisation).2 Climate change increases the likelihood and magnitude of extreme weather events, and changes the long-term expectations for temperature and humidity. The pragmatic effect on human day to day lives for what it means for access to nature, food, transportation and services is difficult to extrapolate well without risking a severe underestimation of those effects. And indeed, climate scientists have sounded the alarm these past few years to signal the potentially catastrophic consequences if the efforts to stall climate change are not sufficient.3 4 5 6 Despite these calls to action, the pace of change to meet the Paris Agreement remains insufficient. Fossil fuels, especially oil, have historically been vectors of economic growth; the future role of fossil fuels is intimately linked with the reduction of greenhouse gas emissions and hence our ability to meet the Paris Agreement objective. Would saving the climate mean that we would sacrifice the economy?
The investments needed to enable a transition to net zero are estimated to require USD 4.8 trillion per year for a decade (about 50% more than it is today), and this is only for the investments in the energy sector (according to the IEA (International Energy Agency).7 Other major GHG-emitting sectors will also need to invest in their infrastructure and research. In addition, investments made for producing fossil fuels that will need to be retired before their planned end of life may crystallise losses for investors who endorsed those projects. For these reasons, public and private investments may view these costs as politically and economically unacceptable, ultimately affecting consumers’ and citizens’ day to day life.
Going back to the opening question, we are going to use a proxy: investment management as a sector often has exposure to most/all sectors, across most jurisdictions. Determining the impact of climate risk on the value of investments is a complex feat: we have to consider future world states (as plausible and challenging scenarios) and quantitative tools to model and calculate the impact of the assumptions related to the scenarios on the investment portfolio. The scenarios are often mapped to archetype scenarios from the IPCC (Intergovernmental Panel on Climate Change) for the physical and socio-economic aspects of the pathways and from the NGFS (Network for Greening the Financial System) incorporating fiscal policy and other macroeconomic outcomes in their assumptions. Quantitative analysis of the investment portfolios is done with specialised metrics such as the Climate Value at Risk (CVaR), using the scenario data to calculate the impacts; however, it is worth noting that most models do not take into account the non-linearity of climate risks, usually associated to tipping points.8
Tipping points are represented in more sophisticated models and show the amplitude of their effect on expected returns. For instance, Ortec’s climate scenarios9 cover a net zero by 2050 with a financial crisis in the short term, a delayed transition with a global warming of 1.9°C and a high warming scenario with a global warming of 3.7°C. The average impact on investment returns for 30 Australian superannuation funds (investment return impacted by a loss of 38% in a high warming world scenario by 2050) as well as the impact on inflation from climate change (a projected increase of 0.7% of inflation from climate change in 2050) create a dual headwind for retirees, who will see their purchasing power falling significantly in the case of a high warming scenario by 2050.