Role of this study

The report focuses on climate change as a systemic financial risk to diversified investors. It argues that capital markets misallocate resources by prioritising enterprise value over portfolio-wide outcomes, despite diversified portfolios ultimately reflecting the intrinsic value of the global economy.

Climate change threatens investors

Greenhouse gas (GHG) emissions are projected to materially reduce global economic value over the next 30 years. Evidence cited shows that investors holding diversified portfolios will absorb these losses, as long-term portfolio performance tracks overall economic output.

Shareholders can use governance rights to reduce economic risks

Investors collectively own companies responsible for the majority of global emissions. Through voting, engagement, and capital allocation, shareholders can influence corporate behaviour and reduce systemic economic risks tied to climate change.

Addressing climate change through stewardship requires guardrails

Current stewardship focuses on “win–win” actions that raise enterprise value, which is insufficient. The report introduces investor-defined “guardrails” that set minimum emissions standards regardless of their impact on individual company returns.

Introduction

The report identifies a structural gap between corporate incentives and diversified investors’ interests. Companies may profit from emissions that undermine the climate system, while diversified shareholders bear economy-wide losses. Governments have also failed to impose an adequate greenhouse gas budget, leaving investors exposed to escalating climate risk.

Critical takeaways from this case study

Corporate emissions reductions occur only where they support enterprise value, leaving substantial unmitigated risk. Diversified investors have economic incentives to drive deeper emissions cuts to protect overall market returns. Economic studies often underestimate climate risk, obscuring potential portfolio losses. Neither enterprise-value-based activism nor regulation has curbed emissions sufficiently.

Climate change impact

Human activity has warmed the planet by more than 1°C since pre-industrial levels. IPCC assessments show that exceeding 1.5°C significantly increases risks to ecosystems, societies, and economies. Climate hazards are increasingly compounding, with impacts cascading across regions and sectors, threatening long-term economic stability.

Potential economic losses by 2050 significantly threaten portfolio values

Current policy trajectories align with around 2–2.6°C warming by mid-century. Swiss Re estimates global GDP losses of around 11% at 2°C and up to 18% at 3.2°C by 2050, compared with a no-warming baseline. Losses are higher in regions such as Asia, Africa, and ASEAN economies. As diversified portfolios represent claims on future economy-wide cash flows, these GDP declines imply similar long-term reductions in portfolio value. GDP also understates true damage, as it excludes depletion of natural capital and other long-lived assets.

Alpha cannot trump beta

The report shows that overall market performance (“beta”) dominates stock-specific outperformance (“alpha”) for diversified investors. System-wide risks like climate change cannot be diversified away. Portfolio construction or security selection cannot offset broad economic decline driven by climate impacts.

ESG integration is not moving companies to paris alignment

Despite extensive investor engagement, emissions reductions remain inadequate. Analyses of major companies show net-zero pledges typically cover only about 40% emissions reductions and rely heavily on offsets. Interim targets for 2030 fall well short of Paris-aligned pathways. ESG integration is ineffective where companies benefit financially from externalising climate costs.

Beyond ESG integration strategies: Guardrails

The report proposes investor-established guardrails: enterprise-agnostic standards applying across portfolios and supply chains. Guardrails aim to solve collective-action and prisoner’s-dilemma problems by levelling competitive conditions. Suggested mechanisms include voting against directors, restricting capital, influencing private markets, and curbing corporate opposition to regulation. Guardrails are intended to complement regulation and reduce emissions while policy gaps persist.

Conclusion

The report concludes that diversified shareholders must move beyond enterprise-value-focused stewardship. Collective implementation of guardrails can reduce systemic climate risk, protect long-term portfolio value, and align corporate behaviour with the limits of the climate system while preserving competitive markets.