Ortec Finance says climate tipping points could swell government debt and erode investor returns within 15 years
Physical climate risk could drive government debt sharply higher while eroding private asset returns over the next 15 years, Ortec Finance warns in its 2026 climate scenario update.
The firm said higher-warming pathways that are closest to the current global trajectory show that extreme weather events and climate tipping points cause sharp and lasting declines in GDP, reduce tax revenues and create large uninsured losses.
The firm’s analysis indicates that climate change alone could push the UK’s debt-to-GDP ratio to 114 percent by 2050 from 102 percent in 2025, and the US ratio to 151 percent from 121 percent over the same period.
Ortec Finance says this added stress will increase sovereign debt risk premia and pressure bond returns as interest rates rise across the developed world and trigger downgrades to sovereign credit ratings in the short to medium term.
Maurits van Joolingen, managing director for Climate Scenarios & Sustainability at Ortec Finance, said the adverse impact of climate change on global GDP, insurability and governments’ ability to use sovereign debt markets “has been an important missing link in the total portfolio assessment of climate risk.”
He added that climate risk does not affect all regions equally and argued for a regional approach to investment strategies and sovereign debt portfolios, especially given their long maturities.
As pension funds search for higher returns and face pressure to invest locally, Ortec Finance notes that many are increasing allocations to private assets.
Van Joolingen said that “pension funds investing in private assets need to be aware of the physical climate-related risks” because these holdings are typically less liquid and sit in portfolios far longer than equities or bonds, with infrastructure and real estate investments often extending beyond 15 years.
Under a Limited Action scenario, where temperatures increase by 2.8 °C by 2100, Ortec Finance projects that US private infrastructure assets suffer a 30 percent loss in returns over 15 years compared with baseline expectations.
Under a High Warming scenario, with a 3.8 °C temperature rise by 2100, losses exceed 60 percent in the US, while in Europe they range from 15 percent under Limited Action to more than 30 percent under High Warming.
For private equity, Ortec Finance estimates that US assets underperform by more than 35 percent versus baseline expectations over 15 years in the Limited Action pathway and by over 65 percent in the High Warming pathway.
In Europe, private equity underperforms by more than 20 percent in the Limited Action scenario and over 50 percent in the High Warming scenario.
The firm says these losses arise as longer-term physical risks begin to be priced into financial markets.
Ortec Finance’s analysis continues to indicate that achieving net zero by 2050 is no longer feasible and directs investors towards its Delayed Net-Zero scenario.
Because transition policy remains weak, geopolitical risks are rising and major governments show limited commitment, investors must now factor in a delayed transition, Van Joolingen said.
They need to consider how “sudden financial market disruption and sustained macroeconomic strain from 2°C warming could materialize under a delayed transition.”
Under this Delayed Net-Zero pathway, Ortec Finance projects that European listed equities could see returns decline by more than 15 percent and US listed equities by around 20 percent by 2030.
Ortec Finance’s proprietary climate scenarios, developed with Cambridge Econometrics, assess a broad range of temperature pathways to 2100 and their systemic macroeconomic and financial market outcomes.
The suite includes Net-Zero, Net-Zero Financial Crisis, Delayed Net-Zero, Limited Action and High Warming scenarios, which together simulate both a successful low-carbon transition and disorderly or failed transitions.
