A temperature increase of 2°C to 3°C could reduce long-term pension fund returns by roughly 10 to 30 per cent relative to current expectations, according to analysis by Ortec Finance.

The annual report, based on the 2026 Ortec Finance Climate Scenarios, investigated the impact of climate change on pension scheme investments, examining 180 pension fund portfolios across the UK, US, Canada, Australia, the Netherlands and Switzerland.

Its limited action scenario, which assumed a 2.8°C increase in warming by 2100, showed that warming at this level could cut long-term investment returns of pension savings by 10 per cent to 30 per cent by 2050 relative to current expectations.

Ortec Finance said its high warming scenario, which assumed a 3.8°C increase in warming by the end of the century, would reduce annual global growth by around 1.6 percentage points by 2065, leaving the global economy around US$58tn smaller than its current growth trajectory and potentially affecting long-term investment returns and pension fund resilience.

Ortec Finance said that pension schemes needed to better understand the impact of climate change on sovereign debt risk, because there was a broad divergence between the most plausible warming scenario currently and possible higher warming scenarios.

Ortec Finance managing director, climate scenarios and sustainability, Maurits van Joolingen, commented: "To fulfil their fiduciary duty, pension funds must understand climate change as both an asset-level and systemic risk.

“The wide range of outcomes across our limited action and high warming scenarios show how climate-related risks can interact, compound and amplify one another, producing markedly different outcomes for portfolios.”

The report found that while climate change is expected to affect pension fund portfolios across all major markets, Australian, Canadian and US schemes face the greatest projected impacts, while Dutch and Swiss funds appear relatively more resilient.

"The climate future that many scientists now consider plausible is not a tail-risk scenario,” added Maurits van Joolingen.

“It is a future that could have material consequences for sovereign debt markets, insurance systems and, ultimately, pension fund returns.

“For investors, the challenge is understanding how these risks interact and vary across regions, while ensuring portfolios remain resilient as physical climate risks become increasingly important alongside traditional financial risks."

The research also highlighted insurance affordability as an early warning sign for investors, and that climate change could increase sovereign credit risk, with implications for pension fund investors.

This article originally appeared in our sister publication Pensions Age.

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