Ortec Finance releases its 2024 climate scenario updates in partnership with Cambridge Econometrics

The scenarios, now in their 10th edition, are designed to help investors translate the potential financial impact of climate change on investment portfolios. The 2024 update features the launch of an additional Delayed Net-Zero scenario and includes climate tipping points in its High Warming scenario.

This update incorporates all major factors that are likely to impact the transition to net-zero including the latest policy and regulatory changes across all major jurisdictions, the fuel and commodity price hikes of 2022-2023 – key outcomes of the war in Ukraine – as well as the continued worldwide uptake of solar and other renewable energies.

The update also factors in the effects of the current El Niño event, which is expected to lower global GDP by 0.25% over the next two years and affect all asset classes. The update anticipates that El Niño will cause an increased number of extreme weather events and a temperature spike of 1.5°C in 2024.

New climate scenarios that facilitate a more realistic systematic examination

The Ortec Finance Climate Scenarios facilitate an increasingly realistic systematic examination of a range of plausible outcomes referenced against the currently deemed most likely trajectory that will see temperatures likely rise by 2°C to 3°C by 2100, known as the reference baseline. This enables investors to quantify key macroeconomic changes and assess impacts on asset class returns under different climate change futures.

The new Delayed Net-Zero scenario reflects the consequences of the scaling back of a highly ambitious set of low-carbon policies designed to drive the world to achieve net-zero emissions by 2050 under the Paris Agreement. This scenario would see EU’s GDP decline by 2040 and experience further decline by 2060 relative to the reference baseline.

To illustrate the comparison, under Ortec Finance’s Net-Zero scenario in which the world reaches net-zero by 2050, the EU’s GDP would likely see an increase, whereas under its High Warming Scenario, there would be a more significant drop.

The latest update to the Limited Action scenario, which is based on current policy action, highlights the implications on cumulative returns on standard equities until 2040, with a -18% impact for the EU relative to the reference baseline, compared to -31% for the US.  

In Ortec Finance’s Net-Zero Financial Crisis scenario, which analyses climate risks abruptly priced into the market in 2025, leading to market overreaction and subsequent shocks, Paris-aligned equities will see a -7% impact in that one year, relative to the reference baseline in comparison to standard equities, which will see a -15% impact.

The updated High Warming scenario also incorporates the implications of multiple climate tipping points materializing, including the collapse of the Greenland and West Antarctic ice sheets, the collapse of East Antarctic subglacial basins, loss of mountain glaciers, Amazon rainforest dieback, and boreal permafrost collapse, all of which could lead to a rapid increase in global temperatures. This scenario would see a profound impact on cumulative returns on standard equities over the next 40 years (2024-2063) relative to the reference baseline across Europe (-54%), China (-59%), the US (-72%) and globally (-66%).

The Ortec Finance Climate Scenarios are key to helping financial institutions quantify the potential impacts of climate change to support the strategic asset allocation process and enabling investors to undertake portfolio stress-testing to further explore the impacts arising from severe physical risks and market sentiment shocks.

When translated across key financial and economic variables, such as GDP and inflation to asset return projections, these scenarios can quantify potential climate-related financial risks, as well as identify areas of opportunity. In unique combination with Ortec Finance’s economic scenarios, this is one of the most comprehensive risk management tools available to institutional investors.