A recent MSCI Sustainability Institute survey highlights the diverging expectations of financial market leaders on emissions trajectories, climate impacts, and the readiness of governments and industries to adapt. The findings reveal a complex mix of scepticism, urgency, and opportunity.

The financial world finds itself at a climate crossroads. As extreme weather events become more frequent and climate policies gain traction, investors are facing a rapidly shifting landscape. According to the MSCI Sustainability Institute’s latest Climate Risk Outlook Study, a survey of over 350 senior investors and risk managers highlights a market deeply aware of climate risks but uncertain about the pace and scale of the global response.

From doubts over the likelihood of achieving net-zero emissions to concerns about the immediate impacts of rising temperatures, the study paints a picture of a sector grappling with both the risks and opportunities of a warming world.

A World Already Feeling the Heat

For most respondents, the future is already here. Over half believe that physical climate risks—such as hurricanes, floods, and wildfires—are significantly impacting the global economy today. These events are not only environmental catastrophes but economic disruptors, damaging infrastructure, disrupting supply chains, and forcing migration. Nearly a third of those surveyed expect global temperatures to rise by at least 3°C by 2100, with a worrying minority anticipating catastrophic warming of over 5°C.

The potential fallout of these changes is staggering. In the coming decade, respondents foresee escalating economic consequences as extreme weather becomes more severe and frequent. While governments are expected to step up adaptation efforts, there is little consensus on whether these initiatives will be enough to prevent widespread economic damage.

Diverging Paths on Emissions

The survey exposes a deep divide over when—or whether—global emissions will peak. Half of the respondents believe emissions could reach their zenith within the next decade, potentially limiting global warming to moderate levels. However, the other half foresee emissions continuing to rise indefinitely, locking in more extreme climate scenarios.

This bifurcation in outlooks is mirrored in attitudes toward the global net-zero target. Nearly 70% of respondents believe that achieving a net-zero economy by 2050 is unlikely. Confidence varies by region: Europe, Japan, and Canada are seen as more likely to meet their climate commitments, thanks to robust political and regulatory frameworks. Meanwhile, scepticism abounds for major emitters like the U.S., China, and India, where political inertia and economic reliance on fossil fuels remain significant hurdles.

Markets Still Underpricing Climate Risks

Despite the growing awareness of climate risks, financial markets have yet to fully adjust. Nearly half of the respondents believe that asset prices do not adequately reflect the risks posed by climate change. Only 7% think these risks are fully priced in, leaving significant room for future market corrections.

High-emission sectors such as oil and gas, aviation, and industrials are viewed as particularly exposed, with substantial transition risks looming. These industries are seen as lagging in their decarbonization efforts, a reality that could lead to stranded assets as the world shifts to cleaner energy sources. Conversely, sectors like utilities and consumer goods are viewed more favourably, as their transition pathways appear more aligned with global climate goals.

This mispricing presents both risks and opportunities. For investors, the challenge lies in identifying sectors and companies that are either underestimating the scale of climate-related threats or undervaluing their potential for green growth. Those who can accurately assess these dynamics may find opportunities to outperform the market as the world adapts.

The Human and Geopolitical Costs of Climate Change

The consequences of climate change extend far beyond the balance sheets. Climate-driven migration is expected to reshape global demographics, with vulnerable regions like Sub-Saharan Africa, South Asia, and the Pacific Islands likely to experience significant outflows. Wealthier regions such as North America, Europe, and Australia are anticipated to absorb large numbers of climate migrants, triggering economic and geopolitical shifts.

Respondents also anticipate climate tipping points, where environmental stresses escalate into broader geopolitical crises. Water scarcity, food insecurity, and resource competition could exacerbate tensions, especially in politically unstable regions. These shifts are likely to have profound implications for investors, particularly those exposed to infrastructure, real estate, and regional markets.

Navigating Uncertainty: Risks and Rewards

Despite the daunting challenges, the survey reveals cautious optimism in some quarters. As physical risks and transition pressures mount, capital is increasingly expected to flow toward solutions such as renewable energy, sustainable infrastructure, and climate technology. These sectors are poised to play a critical role in mitigating the worst impacts of climate change while offering substantial investment opportunities.

Yet, the path forward is anything but straightforward. The market’s response to climate risks will depend on a complex interplay of policy actions, technological breakthroughs, and shifting public sentiment. Investors who can navigate this uncertainty, balancing risk management with the pursuit of sustainable returns, will be better positioned for the long term.

The survey offers a compelling snapshot of how financial markets are responding to the twin challenges of climate risk and the low-carbon transition. It highlights both the urgency of the task ahead and the potential for those who can anticipate and adapt to the coming changes. For wealth managers, the message is clear: climate risk is not a distant threat but a present reality that should be integrated into investment strategies.