Climate and energy scenarios: exploring risks and opportunities

All investment strategies have the potential for profit and loss, capital is at risk.

Climate change is a defining challenge of our time. While its implications are as complex as they are profound, among these are its impacts on the global economy and financial markets. 

As long-term investors, we appreciate the complexities of this task, with the interplay of physical climate risks, technological progress, policy shifts and societal responses that will shape the ultimate transition to a low-carbon future.

Background and scope

When it comes to the impacts of climate change on the global economy, the range of possibilities is mind-boggling. A key question is therefore, how can you get from considering an infinite range of transition possibilities to a set of plausible transition pathways? 

To help navigate this uncertain landscape, we have collaborated with Independent Economics, a London-based consultancy and advisory firm, to produce this report. It follows our first report on the Climate Scenarios Project.

While the first report explored potential climate transition scenarios and their investment implications, the Part 2 report has narrowed its focus to four plausible and distinct scenarios for how the climate transition could unfold over the next decade:

Scenario 1: Physical climate risk
Major climate disasters in the US trigger a belated but strong policy response

Scenario 2: Positive technology momentum 
Rapid green technological progress drives a private sector-led transition

Scenario 3: Significant scaling up of climate finance 
Massive financial flows from developed to emerging markets accelerate the transition

Scenario 4: Recession and 'too little, too late' 
Economic and geopolitical crises distract from climate action, leading to failure

For each scenario, we have examined the key drivers and challenges and how events might unfold. We then produced tailored macroeconomic forecasts and asset class return expectations.

The key questions we explored are: 

What scale of physical damage could turn public opinion without undermining society’s ability to act?

What happens when green technology efficiencies drive private sector competition at scale?

How could a significant increase in financial flows to emerging market countries accelerate the transition?

What if economic and geopolitical distractions force climate actions to be too little, too late?

Key insights

• Successful transition scenarios generally—and perhaps logically—lead to better economic and market outcomes than failed transitions, highlighting the economic benefits of coordinated action and, conversely, the risks of inaction.
• Different scenarios create very different winners and losers across asset classes, sectors and geographies. For example, emerging markets fare much better in the scenario where there is a significant scaling up of climate finance.
• Physical climate impacts can act as a catalyst for action, but if too severe could undermine society's ability to respond effectively.
• Private sector technological progress could potentially drive rapid decarbonization even without strong policy action.
• Massive climate finance flows from developed to emerging markets could accelerate the global transition while reducing inequality.
• Economic crises and geopolitical conflicts pose major risks to climate action by distracting policymakers and depleting resources.

Investment implications

In the report we have sought to provide detailed forecasts for how different asset classes might perform under each scenario. Some key takeaways include:

• Equities perform best in a technology-driven scenario, with green technologies and emerging market stocks particularly favoured.
• Government bonds are generally resilient, but emerging market bonds would benefit significantly in the climate finance scenario.
• Credit in the form of high yield bonds faces challenges in most scenarios due to transition risks, but opportunities exist in green tech and adaptation-focused sectors.
• Real assets, like infrastructure and transition commodities (metals), benefit in successful transition scenarios, while traditional fossil fuel commodities struggle.
• Alternatives, such as insurance-linked securities, face near-term risks from physical climate impacts but could see improved returns longer-term as premiums rise.

These are not forecasts

Rather, they are tools to stretch our thinking about possible futures. They argue that by deeply considering a range of scenarios, we can better prepare for an uncertain future as investors. This in turn leads to a number of practical applications:

• Risk management
  The scenarios help identify potential vulnerabilities in portfolios, allowing investors to stress-test their allocations against different climate outcomes.
• Opportunity identification
  Each scenario points to potential winners and losers, helping investors spot emerging trends and position for long-term growth areas.
• Strategic planning
  By considering these divergent futures, investors and businesses can develop more robust long-term strategies that are resilient to different climate pathways.
• Engagement
  The scenarios provide a framework for engaging with companies on climate risks and opportunities, helping to assess their preparedness for different outcomes.
• Policy advocacy
  Understanding the economic implications of different transition pathways can inform constructive engagement with policymakers on effective climate action.

Looking ahead

This report does not have all the answers, but it does demonstrate how investors can move beyond simplistic assumptions to grapple with the true complexity of potential climate futures.

By combining rigorous quantitative modelling with imaginative qualitative narratives, we have sought to create a means of stress-testing our investment portfolios and strategies against a range of climate outcomes.

While the analysis is investment-focused, the scenarios explored have profound implications for policymakers, business leaders and society at large. Indeed, and as we wholeheartedly acknowledge, they highlight the immense challenges ahead in navigating the climate transition and potential pathways to success. Perhaps most importantly, however, they underscore the critical importance of near-term action to avoid the worst climate outcomes and position the global economy for long-term sustainable growth.

As investors, grappling with these scenarios can help us all play a more informed and constructive role in shaping a resilient, low-carbon future.

Read the full report >

Risk factors

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in January 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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