Planetary Risk: Mapping Climate Pathways To Macro And Strategic Asset Allocation
From Fidelity International, how climate change, and the drive to reduce carbon emissions, must be incorporated into long term capital market assumptions for complete picture of returns.
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 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.
The science on climate change is sobering. We believe that mainstream long-term macroeconomic projections, and consequently consensus capital market assumptions used by the investment industry, underplay both the magnitude and geographical dispersion of climate change impacts on key macroeconomic variables such growth and inflation.