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Key Quotes
“NBIM’s analysis shows that physical climate risk is already a valuation issue . But there is a gap between what the data shows and what the fund feels able to do in response. That raises important questions for investors and policymakers alike.” Amy Owens, Financial Policy Analyst, Carbon Tracker
How NBIM is exposing the market-wide under-pricing of climate risk
The report, Ambition Under Pressure: Analytical Leadership vs. Strategic Hesitation, examines what the climate risk strategy of Norges Bank Investment Management (NBIM), manager of Norway’s Government Pension Fund Global, reveals about the way financial markets are pricing climate risk.
It finds that NBIM has built one of the most advanced climate and nature risk frameworks among global asset owners. Its internal modelling goes beyond many market-standard tools, enabling the fund to assess systemic physical climate risk, climate-nature interdependencies and potential macro-financial spillovers across its portfolio.
But NBIM’s analysis also points to a wider market problem: commonly used climate risk models may be materially understating the scale, timing and systemic nature of physical climate losses. Under comparable temperature pathways, NBIM’s own stress testing indicates that climate-related losses could be several times higher than those suggested by commonly used bottom-up models.
The report reveals that physical climate risk is already a valuation issue. A quarter of NBIM’s equity portfolio by value is exposed to severe physical climate hazards, with business interruption emerging as a major source of potential financial loss.
NBIM is now moving beyond a transition-focused approach towards one centred on physical climate risk, adaptation and resilience. However, Carbon Tracker finds that this analytical progress has not yet translated into major changes in investment strategy, such as portfolio-wide capital allocation signals, interim targets or clearer sector-specific expectations.
The report argues that this gap is shaped by policy uncertainty and by the investment mandate administered by the Norwegian Government, showing how climate policy uncertainty is becoming financially material for large, diversified, long-term investors.
The report draws on other research reports challenging the under-pricing of climate damages in financial decision-making, including Carbon Tracker’s Recalibrating Climate Risk (2026) and Loading the DICE Against Pensions (2023) reports.
Carbon Tracker calls on investors to account for these risks more directly in portfolio decisions and on policymakers to provide clearer, more consistent policy signals.
Key findings
- NBIM now operates one of the most advanced climate-nature risk frameworks among global asset owners
- NBIM has upgraded its internal climate and nature risk analytics, placing it among a small group of global asset owners able to assess systemic physical risk, climate-nature interdependencies and financial spillovers at portfolio scale. These advances now exceed the sophistication of many market-standard tools used by investors and supervisors.
- Standard market tools materially under-state physical climate risk
- NBIM’s top‑down stress testing produces loss estimates several times higher than those produced by widely used bottom‑up models under comparable temperature pathways. This suggests that physical climate risk may remain under-priced across financial markets, increasing the risk of abrupt asset repricing as climate damages become more visible.
- Physical climate risk is already a valuation issue and is reshaping NBIM’s risk management strategy
- A quarter of NBIM’s equity portfolio by value is already exposed to severe physical hazards, with business interruption emerging as a key driver of potential losses. This has driven a strategic shift away from a predominantly transition-focused lens toward one increasingly centred on physical climate risk, adaptation and resilience, reflecting the recognition that further warming, and associated financial losses, are already locked in.
- A gap remains between analysis and investment responses
- Despite its increasingly sophisticated understanding, NBIM’s strategic response remains largely diagnostic rather than directional. Enhanced scenario analysis has yet to translate into portfolio-wide capital allocation signals, interim targets, or sector-specific expectations equal to the risks identified.
- Policy uncertainty and mandate constraints are increasingly shaping NBIM’s climate strategy
- NBIM’s evolving climate posture reflects not only internal risk assessment but also growing external constraints. Political expectations, mandate limitations and inconsistent climate policy signals increasingly influence the scope and pace of strategic action, underscoring the financial materiality of policy risk for long-term investors.
Recommendations
Investors should strengthen climate stress testing by supplementing standard bottom-up models with approaches that better capture cascading, non-linear and tail risks. They should also integrate physical climate risk into present-day portfolio decisions, incorporate nature-related risks alongside climate risk, and link engagement to clearer escalation where companies fail to address financially material climate and nature risks.
Policymakers and regulators should treat climate policy as a financial stability issue. This means providing clear, credible and long-term policy frameworks, improving oversight of climate risk guidance and modelling, and reforming supervisory stress testing to better capture non-linear impacts, tipping points and economy-wide shocks.
