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Climate change, and the policies aimed at slowing it, will shape the path of economic growth this century. Policymakers face a trade-off between the high upfront cost of moving quickly towards net-zero carbon targets, and the long-term physical damage to economic growth and societal cohesion caused by rising temperatures if they delay action.

Macroeconomic projections at the core of long-term capital market assumptions must therefore incorporate both physical climate risks and policy transition risks. Only then will investors have a more complete picture of returns in the 21st century.

In this paper, we introduce the main points of consideration for integrating climate change outcomes into the capital market assumptions (CMAs) that underpin our strategic asset allocation process. 

This includes a description of the scenario framework developed by the Network for Greening the Financial System (NGFS), which is used by key policymakers such as the European Central Bank, and which we expect will become the industry standard. We also assess the impact on GDP growth and asset returns in the decades to come, under a scenario of rising greenhouse gas (GHG) emissions.

Carbon price and inflation pathways

The task of mitigating climate change is a difficult one. It will require tight policy coordination between countries with different emission rates, economic incentives, and political objectives. Summits, such as COP26 this year, have a vital role to play.

In our view, an effective response will require putting a price on carbon emissions, which have been both a free and fundamental part of economic growth for more than a century and a half. As carbon prices rise, this will contribute to inflation rising meaningfully from baseline levels. 

Crucially, to achieve net zero by 2050, the carbon price trajectory is projected to be exceptionally steep, from around $3 per tonne currently (on average) to $150-200 per tonne by the middle of this decade, $200-300 per tonne by 2030 and around $700-800 per tonne by 2050. 


The science on climate change is sobering. We believe that mainstream long-term macroeconomic projections, and consequently consensus CMAs used by the investment industry, underplay both the magnitude and geographical dispersion of climate change impacts on key macroeconomic variables such growth and inflation. 

Stress testing of our present CMA machinery using the RCP 8.5 (‘business-as-usual’ scenario) calibrations highlights significant, differentiated impacts on long-term risk and return projections across different time horizons and geographies. The exercise shows the importance of incorporating climate change pathways into our existing CMAs and the necessity of having a well-defined climate pathway base case when it comes to underpinning our climate-aware SAA framework. 

When it comes to cyclical macro dynamics, market pricing and investment implications, as global policy kicks into gear and brings the transition risks associated with reducing emissions to life, the accompanying rise in carbon prices from a very low base poses meaningful upside risk to inflation over the next few years.

Salman Ahmed

Salman Ahmed

Global Head of Macro

Anna Stupnytska

Anna Stupnytska

Global Macro Economist