A growing number of institutional investors are grappling with how to fold climate change into their capital market assumptions (CMAs), but consensus on the best approach remains elusive.
A recent online panel hosted by Ortec Finance brought together senior figures from USS Investment Management, KLP, D.A. Carlin & Company and Nuveen (a TIAA company) to explore how leading asset owners are navigating this complex and evolving landscape.
Held under Chatham House rules, the discussion made clear that integrating climate considerations into CMAs is far from straightforward. Participants broadly agreed that establishing a climate-aware baseline is hampered by fundamental uncertainty, the limited decision-usefulness of long-term scenarios produced by the Network for Greening the Financial System (NGFS), and a disconnect between top-down and bottom-up analytical approaches. Despite this, many asset owners are pressing ahead, developing their own short-term scenarios, incorporating climate-informed data across both public and private asset classes, and commissioning external research to identify whether any broader market consensus exists.
A recurring theme was what panellists described as a “missing middle link”, the gap between macro-level climate modelling and granular, asset-class-specific insights needed for short- to medium-term investment decisions. This shortcoming, the group concluded, reinforces the urgent need for climate scenario outputs that are genuinely decision-useful rather than academically informative in isolation.
For some participants, the complexity of climate change means a fully integrated climate-aware CMA may never be wholly achievable. Instead, they advocated for short-term climate scenario analysis, typically covering a five-to-ten year horizon, that examines how the energy transition might unfold alongside geopolitical shifts and technological developments. These insights are then layered onto stochastic modelling that extends beyond the ten-year mark, in keeping with pension funds’ fiduciary obligations.
A point of strong agreement across the panel was that divergence between different climate scenario modelling frameworks presents a significant barrier to integration and that this variation is often more pronounced than the differences observed between scenarios with contrasting temperature pathways. This inconsistency makes it difficult for investment teams to act with confidence, raising concerns that insufficiently informed adjustments to CMAs could unnecessarily erode short-term returns.
On physical climate risk, the conversation took a notably urgent tone. Where physical risk was once treated primarily as a long-term concern, a growing cohort of asset owners now regards it as an immediate material risk that must be factored into near-term investment decisions. Improvements in data coverage and granularity are enabling more bottom-up assessments, though the inability to fully quantify extreme impacts, such as losses from major weather events, insured or otherwise, continues to constrain integration into formal CMA frameworks.
The panel, convened by Ortec Finance, ultimately pointed to a set of clear priorities: building robust, plausible climate scenarios that are embedded within existing risk management frameworks; treating climate uncertainty as comparable to other forms of financial market uncertainty; and ensuring physical climate risks are addressed now, even where precise quantification remains out of reach.
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