The heat is on: how investors are underestimating physical risks of climate change

As we stand in the early weeks of 2024, it is increasingly clear that the climate crisis is not only a looming threat but a rapidly unfolding reality. Climate scientists have long warned that we must limit global warming to 1.5°C to avoid triggering climate tipping points and stave off the worst impacts of climate change. Yet, the data from 2023 paints a chilling picture: it was the warmest year on record, and by a considerable margin.

Average global temperatures in 2023 were 1.48°C above pre‑industrial levels (Figure 1) – perilously close to the 1.5°C threshold, beyond which humanity’s ability to influence climate change will significantly reduce as climate systems enter self-reinforcing patterns. Global warming continues its record-breaking streak in 2024. The world experienced the warmest January on record (Copernicus).

As capital market strategists and economists, we are perpetually fine-tuning our assessment of risk in response to emerging data. The off-the-charts climate data stemming from a faster rate of global warming necessitate a critical re-assessment of our understanding of ‘true’ risk in financial markets. The urgency to reduce emissions by around 43% by 2030 to limit global warming to 1.5°C is becoming increasingly obvious, but are we, as a global community, on track to meet this goal?

In this article, I discuss why limiting global warming to 1.5°C is not just a goal for environmental sustainability but a crucial factor for maintaining stability in financial markets. I also look at how it’s appearing increasingly likely that this threshold will be breached within this decade and why more severe and frequent physical risks are expected to hit sooner than anticipated.

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