Pension funds must assess the growing impact of climate risk on both sovereign debt and private assets, Ortec Finance has warned, as its 2026 climate scenario update modelled the effect of physical climate risks on government bond holdings for the first time.

In higher warming scenarios, the firm noted, extreme weather events and climate tipping points would drive sharp and sustained declines in GDP, erode tax revenues and result in significant uninsured losses.

The latest figures showed that the costs of climate change alone could push the UK’s debt-to-GDP ratio to 114 per cent by 2050, up from 102 per cent in 2025.

Ortec Finance said this additional stress would increase sovereign debt risk premiums and put pressure on bond returns, as interest rates rise across the developed world and trigger downgrades to sovereign credit ratings in the short to medium term.

Ortec Finance managing director for climate scenarios and sustainability, Maurits van Joolingen, said: “In our view, the adverse impact of climate change on global GDP, levels of insurability and ultimately the ability of governments to plug the funding gap through sovereign debt markets has been an important missing link in the total portfolio assessment of climate risk.

“While climate risk is a systemic issue, it doesn’t affect all regions equally, necessitating a regional approach to investment strategies and sovereign debt portfolios, especially given their long maturities.

"It’s important for pension funds to evaluate how physical and transition climate risks influence national GDP, debt-to-GDP ratios, insurability and ultimately interest rates.”

Van Joolingen also warned that pension funds need to understand the physical climate-related risks associated with holding private assets - typically less liquid and held for much longer than equities or bonds.

“Investments made now into infrastructure or real estate typically have a 15-year-plus time horizon, so these are highly likely to be affected by rising physical climate risks,” he added.

These findings have implications for pension funds under pressure from the UK government to invest in growth assets as part of the Mansion House reforms.

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