Newsletter: science-based stewardship - December 2025

This is an excerpt from our December newsletter. Subscribe to receive our latest research, insights and updates directly to your inbox.

Future physical climate risks and how to meaningfully incorporate them into pricing, allocation and decision-making frameworks is a thorny problem facing investors today. Mandatory climate reporting in markets like Australia is also sharpening this issue as transparency around the assumptions used by companies and investors will be essential for trust, credibility and assurance.

A recent round table in Norway, bringing together scientists, data providers and pension funds, underscored just how difficult the task ahead is and called for greater cooperation between the scientific and investment communities. Participants highlighted that:

• Climate risk is systemic, with the potential to destabilise the wider financial system.
• Economic models significantly underestimate climate damages, particularly from physical risks.
• Institutional investors lack robust, decision-useful tools to assess climate risk.
• Scenario analysis remains flawed, omitting key transmission channels, long-tail impacts and deep uncertainties.

These concerns echo a growing body of research questioning how far current climate models can take us. As David Stainforth argues, the critical question is shifting from “When is a model realistic enough to predict the future?” to “When is a model too unrealistic to be informative?” Overconfidence in model-based precision risks giving investors a false sense of certainty – making decisions that are optimised for the future inside the model, rather than the full range of futures we may actually face.

This points to the importance of approaches that explicitly foreground uncertainty. Storyline methodologies, for example, explore a range of plausible climate futures without claiming probabilistic accuracy. When we make investment decisions, we consider the spectrum of what is possible. Climate risk is no different. Planning only around a “best estimate” future is inadequate; investors need to prepare for a breadth of plausible physical outcomes which will help with strategic decision making today. The point is to build genuine insight into how a business or portfolio performs across different futures.

What does this mean for investors right now?

The message from both scientists and practitioners is:

• Transparency is important. Assumptions, equations, metrics and pathways need to be clear and visible.
• Scenarios must be understood by end users so they can be communicated to the board, governance committees, and regulators.

While best practice is still emerging, ACCR is engaging with companies, investors, academics and data providers on physical climate risks. If you’re grappling with the same challenges and want to compare notes, we’d welcome the conversation.

Science-based stewardship

Dr Sophie Lewis, ACCR Chief Scientist - Engagement

Why should we be concerned about the state of coral reefs?

If Australia’s Great Barrier Reef were considered a company, it would be the country’s fifth-largest employer.^[1] Every year, it contributes AUD$9 billion to Australia’s economy and supports 77,000 jobs, primarily through tourism.

Looking globally, a 2008 estimate calculated the total net benefit per year of the coral reefs as $29.8 billion.^[2] This includes contributions from tourism and recreation ($9.6 billion), coastal protection services ($9.0 billion), fisheries ($5.7 billion), and biodiversity ($5.5 billion).

The immense economic value of coral reef systems is one reason why it’s a grave concern that in October, the Global Tipping Points report declared we have already crossed the tipping point for coral reef systems.^[3]

Corals are highly sensitive to increased heat. Under warmer conditions, corals become stressed and expel their symbiotic algae, which makes them weak and vulnerable. Scientific evidence shows that above 1.2°C of global warming coral reef systems are irreversibly degraded. We have already hit 1.4°C of warming and reefs are experiencing unprecedented, repeated mass bleaching events. After thermal tipping point thresholds are breached, there are few options for restoration and recovery of coral reefs. This marks a clear tipping point.

Coral ecosystems are widespread, with significant tropical coral reef formations in the Great Barrier Reef off northeastern Australia, in the Caribbean Sea and the Coral Triangle area encompassing Indonesia, Malaysia and the Philippines. When healthy, coral reefs support extensive fishery and tourism economies and provide critical coastal storm protections against flooding and inundation. The unprecedented dieback of corals will have wide-reaching and profound global impacts.

What would a post-dieback world look like? Without healthy coral systems, millions of people will be more exposed to damaging coastal storms, waves, floods, and erosion. The estimated 1 billion people globally who depend on coral reefs for food and fishing-derived income will be radically impacted by coral collapse. The impact will cascade through many economic and social systems, extending far beyond just those countries with reef formations and far beyond sectors directly reliant on reefs. The indirect impacts of the collapse of an entire ecosystem will likely include increased food insecurity, political instability, resource conflict, and increased migration pressures.^[4]

Climate tipping points are connected in complex ways. Tipping in one system can increase the risk of tipping on others. As global warming levels approach 1.5°C, we enter a danger zone for global climate with the potential for irreversible collapse of Greenland and West Antarctic ice sheets and dieback of the Amazon rainforest.

Coral reefs may be the first tipping point we have crossed, but without a significant and accelerated reduction of greenhouse gas emissions, they will certainly not be the last. The global, interconnected nature of the climate system means that we are all deeply exposed to the risks of tipping. Breaching any further climate tipping points must be avoided.

Question of the quarter

Dr Dimitri Lafleur, ACCR Chief Scientist - Insights

Will the 2025 Current Policies Scenario stand the test of time?

The IEA’s decision to resurrect the defunct Current Policies Scenario (CPS) in the 2025 World Energy Outlook (WEO) sparked headlines recently – mainly because it shows oil and gas demand growing to mid-century. But before considering this in relation to any investment strategy, it’s important to understand what the CPS is - and isn’t.

The CPS only includes policies that are currently adopted in legislation and regulation. It assumes no new policies will be introduced, even those that governments have already committed to, and that timebound policies will either not be strengthened after they expire or will stop altogether. What this means in practice, is that under the CPS:

• The EU’s announced import bans on Russian LNG are not implemented
• Japan’s 7th Strategic Energy Plan is not introduced as stated
• Türkiye’s Emissions Trading System is not implemented – 10 years in the making
• India’s Carbon Credit Trading Scheme – slated to start in 2026 – is not implemented
• China’s national non-fossil fuel generation targets will not be exceeded beyond the current expiration date, even though China has already exceeded its 2030 combined installed capacity target for solar and wind.

The rate of technological deployment under the CPS is also conservative. For example, it assumes:

• The share of EVs in global total car sales plateaus after 2035 at around 40%, implying that the current growth trend in China, the EU and the US is not replicated elsewhere.
• Fuel economy improvements for heavy freight trucks slow down, compared with recent years.
• The global uptake of electric heavy freight trucks stagnates at 15% in 2035, despite electric trucks accounting for 22% of new heavy truck sales in China in 1H2025 alone, and BMI forecasting sales^[5] would reach 60% next year (CPS assumes 50% in 2035).

The repercussion of the technological and policy stagnation assumed by the CPS is the significant increase it shows in oil and LNG demand, which leads to higher emissions.

What the CPS is not, though, is a forecast. As the IEA says, it is “not a forecast or a prediction of the way the energy system will unfold” and it should not “be interpreted as a “business-as-usual” scenario”. As our previous analysis shows, fossil fuel supply in successive CPS scenarios continues to decrease^[6], indicating the clear momentum of the energy transition.

While constructing scenarios is a useful way of looking at possible futures, the CPS is an unlikely scenario for the future energy system – requiring significant reversal in technological, market, and policy trends. The bottom line is that the CPS should not be interpreted as a credible investment signal.