Physical climate risk continues to pose the most serious long-term threat to institutional investors, according to a 2025 climate scenarios study warning that “net zero by 2050 is no longer realistic.”
Updated projections reflect temperature spikes and policy developments that have increased inflationary and economic risks on rising global temperatures and lagging climate action, according to the study by Ortec Finance, a provider of technology and solutions for risk and return management.
“Following the warmest year on record, the Paris Agreement target of limiting global temperature rises to 1.5°C by 2100 looks increasingly unlikely,” said Maurits van Joolingen, managing director of climate scenarios and sustainability at Ortec Finance. “Even our most ambitious scenario sees net zero only being achieved by the mid-2050s, with a temperature rise of at least 1.6°C.”
Ortec’s models showed that physical climate risks will be the dominant drag on asset performance. Scenarios incorporating last year’s 0.2°C temperature jump predict significant impacts on inflation and real GDP through 2070.
The firm’s high warming scenario has indicated inflation will rise by 11% in the US and 6% in the UK by 2050 compared to Ortec’s baseline expectations, driven by reduced agricultural and labour productivity. “The combined effect of climate stressors could be highly inflationary and suppress economic growth,” van Joolingen added.
Real GDP growth under the High Warming scenario is expected to slow to 1.1% on average over the next 25 years. From 2050 to 2070, Ortec predicted near-zero growth as worsening climate conditions make it increasingly difficult for central banks to stabilise inflation through traditional policy tools.
The scenario update also modelled how climate change could disrupt credit markets. In one version, a sudden policy tightening in 2030 sparks a spike in corporate defaults. However, in scenarios with limited policy action, such as high warming, the real risk emerges from 2038 onward, when markets fully absorb the long-term implications of climate inaction.
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Asset prices are also expected to take a hit, particularly in equity markets in developed economies. Ortec forecast a decline in UK and US equity performance in the 2030s, triggered by an emerging insurance crisis as providers pull out of high-risk regions due to rising claims.
Despite these, firms see opportunities in renewables and low carbon technologies, according to the research. Returns from sectors like clean energy and electric vehicles remain strong across all successful transition pathways, noting that the cost of battery power alone has fallen by 90% since 2010. “Investors can still realign portfolios to mitigate downside risk and position for long-term resilience,” said van Joolingen. “The gap in returns across sectors exposed to transition risk has never been more stark.”
He added: “It is clear that under current policies, where there is a hiatus in political willpower to reach net zero across large swathes of the developed world, temperatures will continue to break records. As a result, physical risk poses the greatest threat to institutional investment portfolios and the stability of the global financial system. The recent surge in global temperatures and the corresponding risk of triggering a range of climate tipping points accentuates the potential downside even further.
Our latest release of scenarios is designed to help financial institutions fulfil their fiduciary duty to members and stakeholders by ensuring they fully understand climate change’s realistic impact across a broad range of potential outcomes and periods of market disruption. It also equips them with the tools to help mitigate the impact of climate change on their portfolios and identify opportunities for investing towards the low-carbon economy.”
