Analytics and risk management firm Ortec Finance analysed the investment portfolios of 30 large UK pension schemes based on exposure to climate change risks.

It modelled seven different scenarios for the global transition away from fossil fuels and towards renewable energy sources, and found that real estate and listed equities were the most vulnerable asset classes if any such transition was “disorderly” or it failed.

These asset classes alone could decline by 63% in a “worst case” scenario involving a global average rise in temperature of 3.7°C. The report called this a “high warming” scenario and warned that it could “profoundly impact” the financial stability of pension schemes.

“Real estate is particularly exposed to long-term physical risks because UK pension funds currently hold real estate in regions highly vulnerable to physical risks,” Ortec explained.

“Equities, on the other hand, are vulnerable to short-term transition risks, particularly if the transition occurs in a rapid and disruptive manner.”

A “disorderly” transition – which Ortec described as “drastic and uncoordinated policy changes” designed to reach net zero quickly – would result in average losses of 14% over the next five years.

However, if policymakers fail to act and no transition is made, the physical risks affecting investment portfolios could lead to average losses in the region of 30% by 2050, the analysis found.

Doruk Onal, climate risk specialist at Ortec Finance and author of the report, said: “In this high warming stress scenario, the increasing frequency of extreme weather events affecting agriculture, labor and industrial productivity, will have a profound impact on economies and assets.”

The report stated that, under the “high warming” scenario, higher carbon emissions are not addressed or mitigated by government policies. This, Ortec said, would lead to “significant financial impacts materialising by the mid-2030s”.

Investment losses would increase pressure on sponsors, reduce members’ likely retirement income and affect financial stability, the report said.

In its election manifesto, the Labour Party pledged to mandate net zero transition strategies for all financial services companies to “make the UK the green finance capital of the world”.

However, no concrete plans have yet emerged since the party won power in July’s general election.

Despite this, many pension schemes are working to hold companies to account and encourage them to set out their own transition plans.