How to make climate-aware adjustments to Capital Market Assumptions

Net-zero by 2050 and 1.5 degrees Celsius 

In 2016, 195 countries signed The Paris Agreement with an ambitious goal of halting a global rise in temperature greater than 1.5 degrees Celsius above pre-industrial levels. Many signatory countries plan to do this by targeting net-zero carbon emissions by 2050.

Over such a long time period, around 30 years from now, many different climate scenarios may develop, which we find are not priced in by the market. The two main scenarios that we focus on within Invesco Investment Solutions are (i) certainty that countries achieve net-zero by 2050, or (ii) whether countries follow their current policies which account for a less than 100% probability of reaching the net-zero 2050 goals through various pathways. 

Presently, it appears that the market is pricing in the latter scenario which is accounted for in our broad set of CMAs spanning 170+ asset classes. Our approach to modelling the first scenario, net-zero by 2050, is to adjust the capital market assumptions (CMAs) that we use to construct portfolios. Should the probability of reaching net-zero 2050 become closer to certain, the two sets of CMA scenarios will converge.