Ask most finance leaders what they think about climate risk and the answer is usually some version of: we take it seriously, we have a framework, we are working on it. Ask them what has actually changed in how they allocate capital or assess credit exposure, and the answers tend to thin out. Despite the years of investment businesses have committed to scenario modelling and disclosure infrastructure, climate risk consistently ranks near the bottom of CFO priorities.
However, this gap is not about intent but about the decision usefulness of tools available to analysts today. For most of the past decade, climate risk analysis has been built around long-term scenarios projecting out to 2050. These are useful for understanding the broad shape of the transition, but they were never designed to inform near term decisions that move capital.
Why current analysis struggles to drive decisions
The core problem is threefold, and each element compounds the others.
Most climate models are designed around a 2050 horizon, built for system-level policy design and long-range scenario planning. Finance decision makers work within a three-to-five-year frame, and the gap between those two horizons is where decisions fall apart. The EU’s Carbon Border Adjustment Mechanism, creates exposures that are immediate: no long-range model tells a portfolio manager which supplier relationships to reprice or which contracts to renegotiate.
The scenarios themselves also assume a world that does not exist. Most models presuppose coordinated global policy action across regions and sectors simultaneously. In practice, the transition is sharply divergent: the US dismantled the Inflation Reduction Act and withdrew from the Paris Agreement in 2025 while the EU simultaneously tightened its Emissions Trading Scheme and advanced CBAM. NGFS has recently moved toward shorter-term scenarios, a welcome direction, though questions remain about whether the underlying assumptions have kept pace with observed policy reality.
The third issue is granularity. Analysis conducted at sector level aggregates companies with fundamentally different exposures into a single view. Carbon costs hit more carbon-intensive airlines harder than efficient ones. Properties close to flood plains or in wildfire-prone areas face insurability risks that a sector average will never surface. Climate shocks are uneven in their impact, and analysis that treats a sector as homogenous will consistently misread where the real risk sits.
The signals that are already priced in
The risks that drive real portfolio decisions are already visible within a five-year window, flowing through earnings, valuations, and competitive dynamics in specific sectors.
The displacement of internal combustion engine vehicles by electric alternatives is a current market dynamic with measurable revenue implications for automotive manufacturers, fuel retailers, and the refining sector. Competitive pressure from EV manufacturers from China, producing vehicles at price points that are reshaping global demand assumptions, represents a transition risk already being priced into some portfolios and absent from others.
The airline industry follows the same logic – carriers with more fuel-efficient fleets are structurally better positioned to manage high oil price environments than those with older aircraft, and that difference is measurable today using current operational data.
What these examples share is that the underlying risk is visible, quantifiable, and already affecting relative performance across companies in the same sector. Analysis of global equity portfolios has found that within-sector variation in climate value impact can be seven times greater than portfolio-level variation for the most transition sensitive sectors. The spread between the most and least exposed companies within utilities, energy, and materials is not a future outcome to be modelled; it is a present competitive reality.
From expected outcomes to risk thinking
Much of the financial sector still approaches climate through an expected outcome mindset – a single modelled future used as the basis for planning. The problem is that climate change is a source of structural uncertainty that does not resolve into a central case. The range of plausible outcomes is wide, the interactions between policy, technology, and market dynamics are non-linear, and the pace of change in some sectors is already outrunning the assumptions built into standard scenario frameworks.
A risk mindset asks different questions: where are the material exposures, across which range of outcomes do they become significant, and are those exposures already showing up in current fundamentals? Those questions can be answered with near-term data, company-level analysis, and a shorter analytical horizon.
Closing the operationalisation gap
The question facing most financial institutions now is not whether to take climate risk seriously, but whether the tools they are using are matched to the decisions they actually needto make. Stylised long-term scenarios will remain part of the landscape, particularly for regulatory purposes. Tailored analysis that captures near-term shifts in policy, technology, and physical risk, combined with granular company-level insight, is already decision-relevant within the typical planning horizons of financial institutions. Those who overcome the Tragedy of the Horizon through meaningful analytics and act on it will have an edge.
