Introduction

The report analyses how climate risk affects global equity valuations using a probabilistic, state-dependent framework. It highlights that conventional valuation approaches understate long-term climate risks, particularly those arising from policy uncertainty, physical damages and non-linear climate dynamics.

1. How we approach the equity valuation problem

The study integrates climate scenarios into equity valuation by linking expected cash flows and discount rates to different climate states. It adopts a probabilistic framework rather than deterministic scenarios, capturing uncertainty across emissions pathways, policy responses and economic outcomes.

The model incorporates physical damages, abatement policies and tipping points, allowing valuation effects to vary across states. This approach addresses limitations in traditional models, which often overlook tail risks, feedback loops and the full distribution of possible outcomes.

2. How we have organised our study

The study is structured around a modelling framework that combines climate economics with asset pricing. It evaluates multiple emissions and policy scenarios, including strong and weak abatement pathways.

Physical damage functions estimate impacts on productivity and capital, while policy assumptions determine mitigation trajectories. The framework also integrates tipping point risks, enabling analysis of extreme but plausible outcomes. Results are assessed across global equities, capturing both aggregate and distributional effects.

3. Results

The findings indicate that climate risk has a material impact on global equity valuations. Under strong and credible abatement, valuation losses are limited to approximately 5–10%, reflecting reduced physical damages and lower uncertainty.

In contrast, weak or delayed abatement leads to significantly larger declines, with global equity valuations falling by around 40%. The inclusion of tipping points further worsens outcomes, increasing downside risk and amplifying potential losses.

The distribution of valuation outcomes is highly skewed, with substantial tail risks. Physical damages rise non-linearly with temperature, disproportionately affecting long-term cash flows and exposed sectors.

4. Discussion of the results

The results suggest that current market valuations may not fully reflect climate-related risks. The probabilistic framework highlights the importance of considering a wide range of outcomes, particularly low-probability, high-impact events.

Strong abatement policies play a critical role in limiting downside risks, while delayed action increases both expected losses and uncertainty. Tipping points are a key source of systemic risk, reinforcing the need to incorporate non-linear dynamics into valuation models.

Investors are encouraged to adopt scenario-based and probabilistic approaches in valuation and risk management. Policymakers are also implied to support credible and timely mitigation strategies to reduce financial system exposure.

5. Conclusions

The report concludes that climate risk is a significant determinant of global equity valuations, with outcomes highly dependent on policy and emissions pathways. Probabilistic modelling provides a more comprehensive assessment of risks than traditional approaches.

Early and strong abatement can materially reduce valuation losses, while weak action exposes markets to severe downside risk, particularly when tipping points are considered.