A systemic-risk framing: climate and health shocks as macro portfolio risk

The key issue is systemic risk, not just localised impact. Climate and health shocks in emerging markets propagate through interconnected global systems:

Supply chains and inflation: Extreme weather affecting food, water, and energy systems in EMs can raise global prices and disrupt production. This affects corporate margins, inflation expectations, and central-bank policy in developed markets.

Sovereign-credit risk: Repeated shocks weaken EM fiscal balances and debt sustainability, increasing default risk and widening spreads. Developed-market investors are exposed directly through EM debt and indirectly through global financial markets.

Financial-market repricing: Abrupt realisation of climate or health risks can trigger repricing across equities, credit, and infrastructure. The IMF and central banks have warned that climate risks could lead to sudden asset-price adjustments with financial-stability implications.

Global growth and earnings: Emerging markets account for a large share of global growth and supply-chain production. Disruptions in these regions reduce global GDP and corporate earnings, affecting diversified portfolios.

These are systemic risks because they affect the entire portfolio simultaneously. Diversification does not fully protect against them. Instead, reducing the underlying shocks themselves is one of the few ways to hedge this risk.

The investable macro hedge: what pension funds can allocate to

The Strategic Allocation in Adaptation & Resilience Investments (SAARI) framework/facility sets out how institutional capital can help shift the trajectory. It identifies a set of interventions that reduce the frequency and severity of systemic shocks while offering investable, long-duration cash flows such as:

• climate-resilient irrigation and water systems
• watershed restoration and flood protection
• urban water and energy resilience infrastructure
• climate and market early-warning systems
• index insurance and regional risk pools
• pandemic-preparedness infrastructure and health systems

These investments reduce systemic risk by stabilising agricultural output, water availability, energy systems, and health resilience in vulnerable regions. That stabilisation supports global supply chains, sovereign creditworthiness, and growth.

For diversified asset owners, these investments function as a macro hedge. They do not just generate returns; they reduce downside risk across the rest of the portfolio.

Making resilience investment-grade

Resilience investments can be structured to meet institutional requirements:

Revenue-backed infrastructure: Many adaptation assets generate stable cash flows (for example, water utilities, irrigation services, storage and logistics, or digital infrastructure). These can be structured with long-term contracts and inflation-linked revenues.

Blended finance and credit enhancement:  Multilateral development banks and development-finance institutions can provide guarantees, first-loss capital, and political-risk insurance, improving credit quality and enabling investment-grade structures.

Diversified vehicles: Portfolio-level funds spanning multiple countries and sectors reduce project-level risk and provide scale suitable for pension allocations.

Alignment with fiduciary duty:  Investing in systemic-risk reduction aligns with long-term fiduciary responsibility by protecting portfolio value and growth.

Engaging asset managers and consultants: next steps for UK pension funds

For most schemes, the first step is not direct project investment but engagement with asset managers and investment consultants. Pension funds should ask:

• How are climate- and health-related systemic risks currently modelled in portfolio-return assumptions?
• What is the expected impact on long-term returns under different shock scenarios?
• Which resilience investments could act as portfolio-level hedges?
• What investment-grade vehicles exist or are being developed?

Investment opportunities include:

• infrastructure funds focused on water, energy, and climate resilience
• blended-finance vehicles with MDB support
• insurance and risk-pool platforms
• private-credit vehicles financing resilience infrastructure
• diversified resilience funds such as those proposed under SAARI

Asset managers and consultants play a critical role in identifying and structuring these opportunities, assessing risk-return profiles, and integrating them into strategic asset allocation.

Why a small allocation is rational

For an individual pension fund, allocating a small share of capital to resilience investments can be rational. These assets may deliver infrastructure-style returns whilst reducing systemic risk for the rest of the portfolio. If many large asset owners make similar allocations, the aggregate effect can be meaningful: fewer and less severe global shocks, more stable growth, and higher long-term returns across diversified portfolios.

Conclusion: a systemic choice

UK pension funds cannot diversify away from systemic risks in emerging markets. These shocks already affect global growth, inflation, and asset prices. Left unaddressed, they will continue to erode long-term portfolio returns.

Investing in resilience is an impact strategy and a portfolio-protection strategy that can help preserve growth, reduce volatility, and protect member outcomes in an increasingly shock-prone global economy.

For further information on any of this, or the SAARI framework and facility more broadly please contact Sahil Shah on sahil@tippingfrontier.com