Linda-Eling Lee and Oliver Marchand
The world’s investors agree that the risks of severe weather events will escalate and that global action to date is insufficient to stave off the costliest warming, according to a study conducted by the MSCI Sustainability Institute designed to capture what market participants think about our climate future.
The study, which arrives in the run-up to the United Nations COP29 climate meeting in Baku, Azerbaijan, reveals a world united on physical risk but divided on emissions. The exhibit at right displays a stylized visualization of the study results, which reflect the market’s expectations versus common climate scenarios.
* Scenarios data from Phase IV of the Network for Greening the Financial System (NGFS) scenarios for central banks and supervisors. Note that the NGFS published Phase V scenarios on Nov. 5, 2024.
Among our findings, based on a first-of-its-kind survey of 350 investment and risk professionals globally:
- A hotter world: Respondents on average expect global temperatures to rise 2.8oC (4.7°F) above preindustrial levels this century. Thirty-eight percent believe that the world will warm by 3 oC (5.4oF) or greater, including 8% who indicated warming of a catastrophic 5oC (9oF) or more.
- Divergence on emissions and peak oil: Roughly half of respondents say they expect that emissions would peak within the coming decade while the other half say they expect emissions to rise indefinitely. Nearly one-third (30%) of respondents said that oil consumption would peak in the next 10 years, while just over one-third (33%) of respondents said they expect it to increase indefinitely.
- Uneven progress: Roughly three-quarters of respondents say that Europe, Japan and Canada, respectively, would be either somewhat or very likely to meet their climate commitments by 2050. The U.S., China and India, in contrast, would be either somewhat or very unlikely to meet their climate pledges by 2050.
- Climate-related physical risk rising: A majority (57%) of respondents agree broadly that climate-related physical risks are creating economic fallout and growing in severity sooner than current climate scenarios anticipate. A plurality (42%) of respondents say that moderate to high levels of global warming could trigger both environmental and geopolitical tipping points, with those in Europe and Asia expecting more severe impacts than in North America.
- Impact on investment decisions: Just over one-third (34%) said that climate change has had a major effect on the allocation of assets in their portfolio, but more (42%) said it has had only a moderate effect.
A climate scenario shaped by the market
We’ve mapped the market’s expectations to climate scenarios in use already, such as those developed by the Network for Greening the Financial System (NGFS), a network of central banks and supervisors, and find that the market expects a climate future that resembles pessimistic scenarios in a “Hot house world” or “Too little, too late” scenario rather than a world with an early and orderly transition.
We supplemented the survey with panels and interviews of more than 30 experts from finance, policymaking and academia to test and validate how the responses may inform a scenario that reflects market expectations of future climate pathways.
Climate scenarios have helped financial markets supervisors and practitioners better understand a range of climate-related risks. But such scenarios have not been able to tell investment professionals in particular what they say they most want to know to shape their strategies: what their peers across the industry and around the world expect when it comes to changes in policy, advances in technology, and patterns of climate-driven extremes of weather.
And what market peers expect is that the transition will unfold unevenly, driving an outlook marked by high uncertainty that contributes to the mispricing of assets. As political pressures and the risks of physical climate impacts intensify, capital allocators say they must remain agile, ready to navigate both the opportunities and challenges that an uncertain future presents.
You can find further analysis of the survey’s results and a comparison with NGFS scenarios here.
