GIC: Integrating Climate Scenario Analysis into Investment Management – 2023 update

Cambridge Econometrics in partnership with Ortec Finance supported global institutional investor GIC with the latest climate scenario analysis, assessing the impact of climate risks on investment portfolios and the wider economy.

GIC’s portfolio was stress tested against different climate scenarios, in order to identify areas of heightened risk and start to develop mitigation strategies and strengthen climate-resilience.

New to 2023 as an update to the first report published in 2021, a new fourth scenario aligned to a 2-3⁰C outcome ‘Too Little Too Late’ was introduced, as well as the supply side effects of physical climate risks on inflation.

Using ClimateMAPS, an award-winning solution that combines Cambridge Econometrics’ macroeconomic modelling expertise and Ortec Finances’ stochastic modelling, four climate scenarios were applied to the stress test:

  1. Net Zero
  2. Delayed Disorderly Transition
  3. Too Little Too Late
  4. Failed Transition

Key findings

  • While there might be potential upside for certain markets, sectors and companies, projected returns are meaningfully lower over the long run across all scenarios versus a world with no climate change.
  • A hypothetical global portfolio of 60% equities and 40% bonds will see its cumulative returns decline by 10 to nearly 40% over a 40-year period, in comparison to a climate-uninformed baseline. 
  • GIC suggest investors may therefore be surprised by the underperformance of the portfolio relative to their expectations.
  • Investors should prepare for navigating potential increases in market volatility from climate-related shocks, and account for climate-related physical risks as well as transitional risks.
  • Physical risks are highest, and the investment portfolio subsequently fairs the worst, in the Failed Transition scenario. In This scenario, no new climate policies are introduced.

Speak to our expert

János Hidi Principal Economist for Sustainable Investment [email protected]

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