Tensions around the Strait of Hormuz dominate headlines, particularly the economic impact. European Commission (EC) analysis forecasts oil and gas prices will still be 20% higher by the end of 2027.
The energy bottleneck can be felt across all sectors, impacting both the cost of doing business and consumers’ disposable income. In a worst-case scenario, the EC expects the tension will eventually reduce the Gross Domestic Product (GDP) of the European Union (EU) by 0.7%.
While -0.7% is significant, it shrinks compared to the -1.1% GDP loss caused by excessive heat over the past 12 months. This year, Europe suffered an additional 24 hot days, with significant economic ramifications. This is the real issue that should be dominating the headlines: hot days are GDP-killers.
Unsuitable workplace conditions mean poor productivity
Europe's heatwaves (July 2025 - August 2026) already caused 1.6x more GDP damage than the worst-case-scenario Strait of Hormuz forecasts.
The greatest contributing factor was a drop in workplace productivity. Hot days cause absenteeism, illness, tiredness and low-energy workforces. They also led to 35,000 excessive deaths across just four countries, alongside increases in domestic violence and femicide.
Countries that are better adapted to extreme heat like Spain and Italy, experienced relatively stable workplace productivity. Less adapted countries, however, suffered greater economic hits. Poland, for example, experiences 3.4x more productivity loss due to a hot day than Italy.
For investment analysts, workplace conditions become indicators of productivity. Employees in cool offices (by design or air conditioning), with temperature-regulated homes and commutes, perform as usual. While those subject to hot and sweaty environments - such as warehouses - suffer productivity plunges.
Every season will come with its extremes, compounding GDP losses
The -1.1% GDP calculation only considers one year of European hot days. It also doesn't include the economic damage caused by “wet days”. Scientists are predicting a super–El Niño, with 63% certainty. Economists warn it will reduce global GDP by as much as 6.4%, around USD 7 trillion.
In August, we already saw flash floods worldwide, with devastating social and economic effects. Significantly, each event destroys assets like homes and property - not included in GDP calculations.
Every season will come with its own extremes. Taken together, the impact of the climate crisis will decimate GDP. As researchers have uncovered, each additional degree leads to 20% GDP loss. And we are currently headed for an extra 1.5°C within the next four to ten years; 30% GDP loss.
Politicians exacerbate the problem by loosening climate policies
We are already living the climate crisis, and temperatures will not improve. Global GDP growth is already slowing. According to The World Bank Group, the 2020s have been the slowest decade for GDP growth since the 1960s. Extreme weather further undermines economic output.
Frustratingly, politicians (under pressure to boost GDP) opt for short-term, people-pleasing measures like loosening climate policies. Instead of improving competitiveness, further exacerbating the problem. Aside from Big Oil lobbyists, it's doing nobody any good.
In recent years, the EU has watered down the Corporate Sustainability Reporting Directive, Corporate Sustainability Due Diligence Directive and EU Taxonomy Regulation. Although simplification is welcome, these laws are fast-losing power. Meanwhile, the climate crisis worsens, not just because of inaction, but also because politicians actively undo existing legislation. They push the economy backwards.
Pension fund managers have more GDP power than politicians, lobbyists and corporations combined
If politicians cannot save our economy, we must look elsewhere. Pension fund managers are significantly more powerful than politicians, corporations and lobbyists combined. Globally, they manage over USD 68.3 trillion in assets, 74% of GDP. This money speaks louder than policy rollbacks. The flow of pension funds directs the markets.
Unlike politicians, pension fund managers are not short-term people-pleasers either. They think in decades, not days. And their core responsibility is delivering long-term returns in a livable world. They are duty-bound to consider all known risks that may affect clients’ future returns and the cashflows of portfolio companies. Climate, nature and social risks clearly threaten investment returns. This makes pension fund managers a beacon of hope against the worsening climate and declining GDP.
Today (finally) "sustainability", and “ESG” are no longer cordoned off to separate categories. Most investors incorporate them, both from risk and opportunity perspectives. Increasingly, portfolios contain some mix of renewable energy solutions, clean transportation, climate-resilient real estate and agriculture. This is reassuring.
But progress is not fast or hard enough. The research is clear: GDP growth requires both climate adaptation and mitigation. Pension funds must move beyond passive management and into active screening, investigating supply chains and applying pressure.
Sometimes bad investments are painfully obvious. Big Oil talks a lot about the planet, but secretly lobbies governments to loosen climate laws. They destroy GDP and add risk to the portfolio. Other times it's less straightforward. Paper packaging companies are superior to disposable plastic versions, but water usage must be monitored. Digging into these details is the real work of pension fund managers.
Climate inaction will decimate portfolio returns
Research shows that a failed low-carbon transition could wipe 33% off pension fund returns worldwide by 2050. This is around the time that today’s 30-somethings retire, and they’ll know whether their pension fund manager ignored the climate and social risks.
This -30% GDP loss does not just minimise the Strait of Hormuz worst-case-scenario(-0.6%), it dwarfs the entire economic impact of COVID-19. In 2020, COVID-19 caused a -3.4% GDP reduction globally. The GDP hit of the climate crisis and political inaction will be 8.8x greater, within the next decade. But like COVID-19, the true impact didn't come until years later, during the long-tail. Right now, we are in the “year 2020” of the climate crisis. The worst is yet to come.
At this moment, I ask pension fund managers to continue to step-up, remember their duty and plug economic gaps with sensible investing. They are truly the most powerful group to help us adapt and mitigate against the disasters ahead.
