Physical climate risks pose the greatest threat to institutional investment portfolios, while differences in sectoral exposures to transition risks are widening, according to updated scenarios released by Ortec Finance. The Netherlands-based risk management solutions provider said physical risk as a result of rising temperatures and greenhouse gas emissions is the most serious threat to asset performance and the stability of the financial system. “The medium to long-term impact of physical risk is far more pronounced in the scenarios that incorporate last year’s 0.2°C temperature spike and simulate the outcomes of the world’s current climate policies,” the firm said. Ortec Finance has released 2025 updates to its seven proprietary climate scenarios, developed with Cambridge Econometrics, which aim to assess a range of temperature pathways by 2100 and their systemic macroeconomic and financial market outcomes. Under its high warming scenarios, equity asset performance in the UK and US is anticipated to decline sharply in the 2030s due to an emerging insurance crisis, driven by the manifestation and increasing awareness of physical risks associated with rising temperatures. The updated scenarios also reflect faster uptake and lower pricing of clean energy than expected with investment returns from low-carbon and renewable energy technologies viewed as more resilient across all successful low-carbon transition scenarios. “The gap in projected equity returns because of different sector exposures to transition risk has never been more pronounced and creates opportunities for investors to realign portfolios to mitigate any fallout from the transition,” the firm said.
