Pension funds urged to account for climate risk in private assets

Ortec Finance has urged global pension funds to gauge the physical climate-related risks associated with holding private assets, which are typically less liquid and held for much longer than equities or bonds.

"Investments made now into infrastructure or real estate typically have a 15-year plus time horizon, so these are highly likely to be affected by rising physical climate risks," Ortec Finance managing director for climate scenarios and sustainability Maurits van Joolingen said.

Ortec Finance estimates private infrastructure assets in the US will suffer a 30% loss in returns over the 15-year horizon, under a limited action scenario where temperatures increase by 2.8°C by 2100. Losses will exceed 60% in a high warming scenario where temperatures increase 3.8°C by 2100, it said.

Losses under these scenarios occur as longer-term physical risks begin to be priced into financial markets.

In Ortec Finance's latest scenarios, physical risk caused by extreme weather events will lead to sharp and lasting declines in GDP, much reduced tax revenues and large uninsured losses.

"This added stress will lead to an increase in sovereign debt risk premia and exert severe pressure on bond returns, as interest rates significantly increase across the developed world and trigger downgrades to sovereign credit ratings in the short to medium term," it said.

Van Joolingen noted the importance for pension funds to evaluate how physical and transition climate risks influence national GDP, debt-to-GDP ratios, insurability and ultimately interest rates.

"In our view, the adverse impact of climate change on global GDP, levels of insurability and ultimately the ability of governments to plug the funding gap through sovereign debt markets has been an important missing link in the total portfolio assessment of climate risk," Van Joolingen said.

In its 2025 update, Ortec Finance said achieving net zero by 2050 is no longer feasible. Its analysis maintains this stance and it pointed investors to its delayed net-zero scenario to understand climate risks on investments.

Van Joolingen urged investors to understand how sudden financial market disruption and sustained macroeconomic strain from 2°C warming could materialise under a delayed transition.

"With physical risks remaining insufficiently priced in across all asset classes, investors who understand these climate-induced risks have the ability to access first mover advantage, with a realistic and comprehensive climate risk assessment derived from plausible robust scenarios," he added.