Institutional investors face challenges integrating climate change into their capital market assumptions amid scientific uncertainty and varied scenario frameworks, prompting a move towards shorter-term, probabilistic modelling and more granular physical risk assessments.
Institutional investors are increasingly trying to weave climate change into their capital market assumptions, but the industry is still a long way from a settled method.
A recent online panel organised by Ortec Finance, which included senior figures from USS Investment Management, KLP, D.A. Carlin & Company and Nuveen, underlined how unsettled the issue remains. Held under Chatham House rules, the discussion pointed to a persistent tension between the need for climate-aware forecasts and the difficulty of turning uncertain science into assumptions that can guide portfolio construction.
One of the clearest obstacles is the mismatch between broad climate models and the practical needs of investors. Panellists described a “missing middle link” between high-level scenario work and the more detailed asset-class analysis required for day-to-day decisions. In their view, long-range frameworks such as those developed by the Network for Greening the Financial System are useful as reference points, but often too abstract to drive near- and medium-term allocation choices with confidence.
That gap is pushing many asset owners to develop their own shorter-horizon scenarios, typically covering five to 10 years, and to combine them with longer-term stochastic modelling. The idea is to assess how the energy transition, policy shifts, geopolitics and technological change may interact before extending the analysis further out, where pension funds still need to think about fiduciary duties and long-duration liabilities.
There was also broad agreement that the differences between climate scenario frameworks can be more significant than the differences between temperature pathways themselves. For investment teams, that creates a practical problem: if the models do not line up, it becomes harder to know when climate adjustments to CMAs are robust enough to influence returns and when they may simply add noise.
The debate has been shaped in part by the way major investment houses are adapting their own assumption sets. BlackRock has said its capital market assumptions now incorporate factors such as digital disruption, artificial intelligence and climate risk, while also arguing that neutral portfolio positions are no longer a safe default. Its climate-aware investment material says transition risks and opportunities should be built into return forecasts rather than treated as an afterthought.
Other research points to the same broad conclusion, but with more explicit caution about the limits of precision. A discussion paper from the Centre for Economic Policy Research proposes a probabilistic approach to climate scenario design, arguing that investors need more plausible policy variation across sectors and regions, a baseline anchored in market pricing and explicit probabilities attached to different outcomes. Its findings suggest a lower-carbon world is likely, but a neatly Paris-aligned path is not.
The panel also reflected a change in tone on physical climate risk. What was once often framed as a distant threat is increasingly being treated as immediate and financially material. Better data coverage and more granular mapping are helping investors look at exposure at a more detailed level, but the hardest losses remain the least tractable to model, particularly extreme weather events and the degree to which insurance does, or does not, absorb them.
That leaves investors in an awkward position. They are under pressure to recognise climate change in their assumptions now, yet they still lack a framework that is both consistent and sufficiently decision-useful. The practical answer emerging from the discussion was not to wait for a perfect model, but to embed plausible climate scenarios within existing risk processes, treat uncertainty as a normal feature of financial markets and bring physical risk into current decisions even where it cannot be neatly quantified.
- https://fintech.global/2026/05/07/climate-risk-and-cmas-what-investors-need-to-know/?utm_source=rss&utm_medium=rss&utm_campaign=climate-risk-and-cmas-what-investors-need-to-know – Please view link – unable to able to access data
- https://www.blackrock.com/institutions/en-axj/insights/charts/capital-market-assumptions – BlackRock’s Capital Market Assumptions (CMAs) provide strategic views on long-term returns, incorporating factors like digital disruption and artificial intelligence. They use scenarios to capture a wide range of potential outcomes, reflecting the accelerating economic transformation. The CMAs suggest that a neutral portfolio is no longer stable, advocating for a dynamic approach to portfolio construction. BlackRock’s latest strategic views include upgrading high yield debt to overweight and downgrading developed market government bonds to neutral, emphasizing the importance of adapting to evolving market conditions.
- https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/investing-in-climate-awareness – BlackRock’s Investment Institute introduces climate-aware return assumptions, integrating climate risk into portfolio design. Recognizing climate change as a key driver of asset pricing, they update their Capital Market Assumptions (CMAs) to reflect its impact. The institute emphasizes that sustainability is essential in investment decisions, not an afterthought. They highlight the transition to a carbon-neutral world as a historic investment opportunity, with the ‘green’ transition rewarding companies, sectors, and countries that adapt, while penalizing those that do not.
- https://kpmg.com/us/en/articles/2022/ngfs-primer-climate-scenarios.html – The Network for Greening the Financial System (NGFS) has developed six distinct climate scenarios to help financial institutions manage transition risk. These scenarios include Net Zero 2050, Below 2 °C, Divergent Net Zero, Delayed Transition, Nationally Determined Contributions (NDCs), and Current Policies. Each scenario represents a different pathway for global climate action and its economic implications. The NGFS categorizes these scenarios into three transition types: Orderly, Disorderly, and Hot House World, based on the global response to climate change.
- https://cepr.org/publications/dp17944 – A discussion paper by the Centre for Economic Policy Research (CEPR) presents a bespoke, probabilistic approach to climate scenario analysis. The paper develops a new method for designing climate scenarios and assessing the impact of physical and transition climate risks on companies and markets. Key innovations include allowing for more plausible policy variation across sectors and regions, developing a baseline scenario benchmarked against market pricing, and assigning probabilities to scenarios to analyze long-term asset valuations. The findings suggest that while a lower-carbon global economy is likely, convergence on a Paris-aligned trajectory is unlikely, with a projected 2.3°C warming by 2100.
- https://www.morganstanley.com/ideas/climate-scenario-analysis – Morgan Stanley discusses the importance of climate scenario analysis for investors, offering a methodical approach to understand the portfolio impacts of different environmental and economic outcomes. The article highlights that while estimating the long-term effects of climate change on portfolios is challenging, climate scenario analysis can be a useful tool. Using specialized computer models, this analysis assesses the potential impact of future events, helping investors understand related risks and opportunities. It emphasizes that institutional investors can use this process to quantify the economic effects of climate change on their portfolios at various levels.
- https://returnoneurope.com/are-climate-risks-underpriced/ – An article from Return on Europe examines the underpricing of climate risks in asset valuations. Despite growing awareness of climate change, surveys reveal a disconnect: 93% of major investors acknowledge that climate issues will likely affect investment performance in the next 2–5 years, yet only 4% believe these risks are mostly reflected in asset prices. This suggests that markets have not fully priced in climate risks, leaving room for active investors to reposition ahead of the pack. The article discusses the challenges investors face in quantifying long-term climate threats and the implications of underpricing these risks.
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The draft above was created using the information available at the time the story first
emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.
Freshness check
Score:
8
Notes:
The article was published on May 7, 2026, which is recent. However, the content references a panel discussion held under Chatham House rules, which may limit the availability of detailed information. The article also mentions that the debate has been shaped in part by major investment houses adapting their own assumption sets, such as BlackRock incorporating factors like digital disruption, artificial intelligence, and climate risk into their capital market assumptions. This suggests that the discussion is part of an ongoing industry trend, and similar narratives may have appeared in other publications within the past week. Therefore, while the article is recent, the topic is part of a broader ongoing discussion in the industry.
Quotes check
Score:
6
Notes:
The article includes direct quotes from the panel discussion held under Chatham House rules. However, due to the confidentiality of Chatham House rules, these quotes cannot be independently verified. Additionally, the article references statements from major investment houses like BlackRock, but without direct citations or links to original sources, the accuracy of these claims cannot be confirmed. The lack of verifiable sources for these quotes raises concerns about their authenticity.
Source reliability
Score:
7
Notes:
The article is published on fintech.global, a platform that aggregates content from various sources. While it provides a summary of the panel discussion, the lack of direct citations to original sources or primary data diminishes its reliability. The absence of links to the original panel discussion or official statements from the mentioned investment houses further reduces the credibility of the information presented.
Plausibility check
Score:
7
Notes:
The article discusses the challenges institutional investors face in integrating climate change into their capital market assumptions, referencing a panel discussion with representatives from USS Investment Management, KLP, D.A. Carlin & Company, and Nuveen. While the topic is plausible and aligns with current industry trends, the lack of verifiable sources and direct citations raises questions about the accuracy of the claims made. The absence of specific details from the panel discussion further diminishes the plausibility of the content.
Overall assessment
Verdict (FAIL, OPEN, PASS): FAIL
Confidence (LOW, MEDIUM, HIGH): MEDIUM
Summary:
The article presents a summary of a panel discussion on integrating climate change into capital market assumptions, referencing statements from major investment houses like BlackRock. However, the lack of direct citations, verifiable sources, and the confidentiality of the panel discussion under Chatham House rules raises significant concerns about the accuracy and reliability of the information presented. The absence of specific details and direct links to original sources further diminishes the credibility of the content. Therefore, the article fails to meet the necessary standards for publication.