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While the potential impact of climate change on future global economic growth has been well flagged, models are underestimating the likely hit to investment portfolios and pension fund holdings, according to major investors and analysts.
Norway’s oil fund (NBIM), the world’s biggest asset manager, warned earlier this year that its US equity investments could lose 19% from disasters such as floods and droughts if climate policies continue on their current path and temperatures rise by an average of 3 degrees by 2100.
“We believe the effects of physical climate risk on the fund may be severely underestimated,” the fund wrote in its annual climate and nature disclosures.
“Unless global emissions peak very soon and fall significantly, the economic costs associated with physical climate risks in numerous countries are projected to accelerate at an increasing rate, and potentially in a non-linear manner due to various tipping points, during the latter part of this century.”
NBIM said while it calculated a 19% drop in US equities, MSCI’s Climate Value at Risk (CVaR) model, used by many asset managers, predicted its portfolio would lose just 2% by 2080.
The fund, which has over US$1.9tn in assets and holds about 1.5% of the world’s listed companies, said it believed its forecast for higher losses than the MSCI model was more credible because its estimate includes a wider range of economic impacts from climate change.
“Approaches which seek to estimate portfolio-wide losses from physical climate risk inherently fail to capture the systemic effects to the macroeconomy that climate change is certain to generate,” it said.
The Network for Greening the Financial System (NGFS) has predicted that global GDP could fall 30% by 2100 under current policies, with tail risks for a decline of up to 50%.
NGFS forecasts that some countries could see their economies shrink by a quarter as soon as 2050 from chronic climate risk, while climate disasters could already dent global economic growth by up to 3% within the next five years, according to new NGFS short-term scenarios.
“There’s a disconnect between what’s being done on the GDP and economic side and what’s been done on the asset management side,” said Alasdair Doherty, sustainable finance analyst from the Institute for Energy Economics and Financial Analysis.
False sense of security
Doherty noted that the MSCI predictions suggest that an orderly transition with a lower degree of warming would have a similar impact on portfolios compared to a disorderly transition with a higher degree of warming.
That has helped portfolio managers justify inaction on climate change, Doherty said, noting that sovereign wealth and public pension funds like those of Norway, Japan, Korea and Singapore have been using MSCI’s data in their reporting for years.
“While modern GDP-based modelling is likening the impact to ‘fighting a permanent global war’, or ‘experiencing the great depression in perpetuity’, the only method for judging the dangers to portfolio value clearly don’t tally,” he said.
MSCI did not respond to a request for comment on the criticism of its model.
Investment consultants are inadvertently misleading fund managers on the climate, according to a 2023 report by independent thinktank Carbon Tracker.
“The increasing use of climate scenarios by investors which ignore, downplay or defer looming climate risks creates a false sense of security in the minds of those deploying capital, that financial consequences of climate change for markets can be divorced from the severe social and ecological damages,” the report said.
“As a result – pension fund capital continues to be deployed to high carbon sectors lobbying against rapid transition – effectively acting in opposition to investors’ stated climate policy goals, with capital withheld at the requisite scale from the clean energy projects and companies required to deliver upon global climate goals.”
Investors may be surprised by potential climate impact
Singapore’s sovereign wealth fund GIC predicted in 2023 that climate change could wipe out 10% to 40% of a hypothetical global portfolio made up of 60% equities and 40% bonds: “Hence, long-term investors may be surprised by the underperformance of the portfolio relative to their expectations.”
Business school EDHEC made a similar forecast: global stocks could lose more than 40% if no action is taken to bring climate change under control.
“We find that a severe impact on equity valuation can be obtained with very plausible combinations of policies and physical outcomes, and that there is considerably more downside than upside risk,” the EDHEC paper said. “Robust abatement policies strongly limit the impact of climate change on equity valuation.”
EDHEC noted that NBIM said that the MSCI model predicted that its equity portfolio would only fall as little as 4% even with warming of almost 5°C, which it said failed the “laugh test”, given that some economists are arguing that just 1°C warming would create a 12% fall in GDP.
Amy Owens, capital markets policy analyst for Carbon Tracker, said it was encouraging that NBIM was highlighting the flaws of the MSCI model.
“NBIM shifting on this agenda is big because they set the scene particularly in Norway and they are massive so they have more resources to delve into this than the smaller pension funds,” Owens said.
Carbon Tracker raised the issue of the modelling problem at a meeting it hosted with Norwegian pension funds and civil society representatives in Oslo in June.
However, Sondre Hansmark, senior adviser at Norwegian think tank Langsikt, is sceptical that the new modelling will make much difference at NBIM, which is bound by a mandate from the Norwegian parliament that focuses on maximising returns.
“No Norwegian politicians or newspapers are interested even though it could mean we lose one fifth of our sovereign wealth fund,” Hansmark said.
He noted that Norway’s oil fund is still heavily invested in fossil fuels: “They don’t have a coherent strategy for how they’re going to fulfil their pledge to the Paris agreement and their investments.”
“They also speak with a forked tongue,” Hansmark said. “They have to be very cautious in terms of how they go about allocating funds because it could be viewed as a political statement.”
NBIM has said it is working to encourage the companies it invests in to align their operations with the goals of the Paris Agreement: “As a global, long-term investor we have an inherent interest in the achievement of the global climate goals, and the reduced degradation of biodiversity and ecosystems.”
This page was last updated July 16, 2025
Written by
Emma Thomasson is a British journalist, consultant and trainer based in Berlin. She is an expert in economics, politics, business and technology. She previously worked for Reuters as a correspondent and bureau chief in Germany, Switzerland, the Netherlands, South Africa and the UK.
