Request Free Trial
April 27, 2023

Transition, inflation and climate scenarios

Customer paying for fruit and vegetables
GIC’s report looks at the long-term impact of climate change on inflation (Photo: Dominic Lipinski/Bloomberg)

A report by GIC predicts the impact of four climate scenarios on investment portfolios and economic indicators, including inflation.

GIC, the investor managing Singapore’s foreign reserves, has published an interesting climate scenario study that fleshes out the impact of physical risks on global economic growth.

The first climate scenario analysed by the report models for the achievement of net zero by 2050, followed by “delayed disorderly transition”, which secures net zero by 2070. A “too little too late” scenario, meanwhile, does not see net zero achieved before the end of 2100, with global temperatures rising by 2C to 3C.

Temperatures rise by around 4C in its fourth model, which assesses the impact of a failed transition. The analysis considers the impact of each scenario on a global investment portfolio comprising 60 per cent global equities and 40 per cent global bonds.

GIC expects markets to smoothly price in transition and physical risks between 2022 and 2025 under its optimal net zero scenario. There will be a “sharp pricing in of physical and transition impacts within a short period of time” in a delayed disorderly transition. There would be a “successively sharper pricing in of physical and transition risks” during the 2030s in its third model, while under a failed transition markets only price in physical risks.

The report also looks at the relationship between transition risks and inflation. GIC observes that this depends on the time horizon used.

Climate change has a neutral, long-term impact on inflation, the investor says. It notes that physical risks can suppress growth and demand, weighing on inflation as a result, while also decreasing crop yields and consequently increasing prices. “The net outcome [of physical risks] in terms of trend inflation rate is marginally positive,” GIC concludes.

You can access the full report here.


A service from the Financial Times