Scott Kalb and his co-author took the long-term return forecasts published by the 40 largest providers in the world, ran the aggregate through three climate scenarios built by a group of more than 100 central banks, and found expected returns lower and risks higher in almost every case.
Those forecasts — capital market assumptions, the numbers institutions use to decide how much to hold in stocks, bonds, property and everything else — are built roughly 60% to 70% on historical data. Kalb's point is not that the people producing them are careless. It is that a model assembled out of the past cannot price something that has never happened before.
"It has more to do with the architecture than the inputs."
Kalb spent four years as chief investment officer and deputy chief executive of the Korea Investment Corporation, Korea's sovereign wealth fund, and now runs the Responsible Asset Allocator Initiative at Tufts, which rates and ranks 300 of the world's largest asset owners.
I listened to the full interview so you can skip it. 44 minutes of audio, 20 minutes of reading.
Here are the 16 takeaways that matter.
👤 Guest: Scott Kalb, Director of the Responsible Asset Allocator Initiative at the Fletcher School at Tufts University and former Chief Investment Officer and Deputy Chief Executive of the Korea Investment Corporation, who co-wrote the capital market assumptions chapter of the Handbook of System-Level Investing
🎙️ Host: Georges Dyer, Co-Founder and Executive Director of the Crane Institute of Sustainability and its Intentional Endowments Network, which produces the podcast
👥 Also on: William Burckart, Co-Founder and Chief Executive of The Investment Integration Project and an editor of the Handbook of System-Level Investing, who co-hosts this series of episodes with the book's chapter authors
📰 Published: 9 September 2026
🔴 YouTube | 🟣 Apple Podcasts | 🔗 Show notes | ⏱️ 44 min | ✅ Time saved: 24 min
Key Takeaways
Aggregate the 40 largest providers' return forecasts, run them through climate scenarios, and expected returns fall while risks rise in almost every case
The three scenarios used were 1.5°C, 3°C and a hothouse world of 4°C or more above baseline
The reason climate is missing is the design of the model, not the quality of the people building it
Roughly 60% to 70% of a capital market assumption is backward-looking historical data, and about 20% is the persistence of current trends
Kalb does not think providers are hiding pessimistic numbers — he thinks they don't yet trust their own method for producing them
An asset owner's cheapest move is to ask its provider what climate assumptions are in the forecast, and to supply its own if the answer is none
Flawed inputs are a fiduciary problem, because the allocation model built on them can overexpose a fund to damage and underexpose it to solutions
Climate scientists work in 30- and 40-year projections and investors work in three-year ones, and nothing bridges the two
Layering a net-zero goal or a thematic strategy on top of a legacy benchmark is not the same as changing the allocation model underneath it
As temperatures rise the distribution shifts, so yesterday's black swan becomes today's fat tail
Kalb's term for climate specifically is a black elephant: unpredictable in timing, but obvious in the room
300 of the world's largest allocators hold enough assets that 1% of them redirected would be an enormous pool of capital for solutions
Kalb and his co-author disagreed on plenty and agreed that the big benchmark indexes are not pricing climate risk properly
1. Running Korea's $250B Fund
Dyer opened by asking for the background, and Kalb went straight to the job that gave him standing with other asset owners.
Kalb ran a foreign government's sovereign wealth fund, which he said almost never happens. He spent about four years as chief investment officer and deputy chief executive of the Korea Investment Corporation, which he put at "about a $250 billion sovereign wealth fund today." "It's not often that you have a foreigner asked to run another country's sovereign wealth fund."
Dyer's own introduction put the fund at $200 billion; Kalb used the larger figure on air
After Korea, Kalb set up an institute for sovereign wealth funds, large public pension funds, social security funds and central bank reserve funds — the group he calls asset allocators. That work then became the Responsible Asset Allocator Initiative, which serves the same community but focuses on deploying capital responsibly while still hitting the returns each fund's beneficiaries need
Kalb said the pivot happened because his clients moved first. Institutions began to want returns generated "in a way that perhaps caused less harm" and in the general interest of the savers whose money they hold. "Things have certainly changed since when I started where we focused primarily on modern portfolio theory which is not so modern today anymore"
2. Climate, Not Inequality
Burckart raised Delilah Rothenberg and the Predistribution Initiative, whose work treats inequality rather than climate as the defining systemic risk, and asked what Kalb's framework could do for other issues.
Rothenberg was instrumental in the capital market assumptions work, Kalb said, before stepping down from it to concentrate on inequality full time. The Predistribution Initiative is now focused there, and Kalb said his own group is interested in following
Kalb said the method is not climate-specific. "I do think that this model applies more broadly." The reason the chapter is about climate is that climate is where the science and the economic modeling are furthest along, not that other systemic risks matter less
Burckart's framing was that the chapter should at least nod toward what the framework could do for other issues — a point Kalb returned to at the end of the interview when he said other systemwide risks need modeling of their own
3. What a CMA Actually Is
Dyer stopped the conversation to have the term defined for listeners who are not professional investors.
A capital market assumption is the estimate of what each asset class will return over the next decade or two, and it is where portfolio construction starts. "So capital market assumptions or CMAs for short are the building blocks of portfolio construction." They are built from long-term macroeconomic assumptions — interest rates, inflation, GDP growth, earnings growth, income generation, dividend flows. "And those are used to estimate returns by asset class for the next 10 to 20 years."
Kalb said published forecasts exist for virtually every asset class, and that an institution designing its asset allocation relies on them to decide the right combination of holdings
Dyer's plain-English version, which Kalb accepted: it is the really big picture of where the world is going and how that will affect investments
4. The Unfunded-Liability Job
Burckart brought the pensions his own firm works with into the conversation, and the exchange established the constraint everything else in the interview runs against.
Pension staff who like the idea of system-level investing still demand to see it in the plumbing. Burckart said he has heard on multiple occasions that a fund needs to be shown "how it gets integrated into a CMA" before it will move, because those are the building blocks
Their first problem is not climate. Burckart said what he hears from pension boards is that they have unfunded liabilities, and that is the first job they have to solve for
Kalb agreed and made the obligation concrete. The mission is making sure a pensioner "gets her $100 check every month." "So, the key is that they need to know when they're investing and doing these things that it's not going to interfere with their mission." The pitch has to be that the approach enhances the mission — mitigating risk and generating better returns than doing nothing
"Most of them really want to do these things, but they need the tools to be able to do them."
5. 40 Providers, 3 Scenarios
Asked what a climate-adjusted capital market assumption actually looks like, Kalb described the exercise behind the chapter.
The study aggregated the forecasts of the 40 largest providers in the world and ran the result through three climate scenarios. The scenarios come from the Network for Greening the Financial System. "NGFS is an association of over a 100 central banks that are pooling their resources who are very concerned about the impact of climate change on the global financial system."
The three cases were, in Kalb's words: "The three scenarios were one where global temperatures stay where they are through the end of the century about 1 and a half degrees centigrade above the baseline." Then "The current policy trajectory where temperatures rise to about 3° above baseline and then a hot house world where you're four degrees or more above baseline."
The result was one-directional. "And what we found is that in almost every case the expected returns will be lower and the risks higher than indicated by current CMAs." Kalb's conclusion from it is that the forecasts institutions are using today are not built with climate change in them
Burckart called that a large oversight at this stage and asked whether the climate science simply has not reached the modeling yet
6. Why the Architecture Fails
Kalb refused to blame the firms producing the forecasts, and located the problem in how the forecasts are constructed.
"I mean, I don't fault the guys. I think these are very thoughtful, you know, accomplished professionals." The failure is structural: "It has more to do with the architecture than the inputs."
The proportions are the argument. "I mean the way that CMAs are constructed is roughly 60 to 70% based on backwards looking trends and historic data" and a further slice is "about 20% based on persistence of current trends" over the next couple of years. Burckart's response was that only a small piece is left for anything else
Kalb said the design has worked well until now and cannot work here. "The problem with climate change is that we're moving into uncharted territory. We've not been here before." A model built from history has no way to carry a forward-looking impact into its output
Asked who the providers are, Kalb said they are asset management and investment consulting firms — "all the big guys" — and named BlackRock, Mercer and Northern Trust as examples whose forecasts are published on their own websites
An institution can build its own instead, using what was described on air as a building-block methodology, but almost none do. "But you can build your own." Doing it across every asset class takes a lot of people and a lot of work, so most allocators rely on the outside firms
7. Ask Your CMA Provider
Dyer put to Kalb a claim from the chapter itself: that CMA providers face commercial pressure to avoid overly pessimistic numbers, and that herding discourages allocators from straying from consensus. Kalb's answer softened the accusation.
Kalb's reading is discomfort with method rather than fear of a bad headline number. The large firms do not feel they have the right pathway or methodology for adjusting, he said, and are reluctant to change something formulated over decades. In his view they have not yet caught up with the science and the new economics
The remedy he gives asset owners is a conversation, not a rebuild. "So, the first thing is start questioning what are you doing?" Ask the provider whether climate change is in the forecast and how; if it is not, hand over the institution's own assumptions on temperature paths or GDP growth and ask for the models to be run with them
Kalb said the providers will do it. What the institution has to supply is the question and the assumptions
He described this as the relatively easy thing to do, against building a set of assumptions in-house, which is resource intensive
8. The CIO's Puzzle
Kalb stepped back to explain to the audience how a large fund's investment office actually operates, because the CMA sits at the center of it.
The board hands the chief investment officer a return target set by the fund's liabilities — the pensions, retirement or savings benefits it has to pay. The board also sets risk constraints, such as volatility targets and concentration limits, and benchmarks that define where the fund may and may not invest
The chief investment officer's job is to hit the target without breaking the constraints, and the CMAs are what makes that solvable. "I've got to go and make this return but I also have to make sure I stay within the risk constraints that I've been given." The forecasts tell her what each asset class is expected to return, and she assembles equities, alternatives and fixed income into a mix that clears the target — deciding where to be overweight and where to be underweight
Kalb described it as putting puzzle pieces together, and said it is complex with a lot of moving parts. The relevance to the rest of the interview is direct: every piece of that puzzle is priced off the forecasts
9. Flawed Inputs, Bad Models
Dyer raised the financial return imperative from the chapter and asked whether questioning a provider is part of an asset owner's fiduciary duty. Kalb said the fiduciary problem starts one step earlier.
The fiduciary risk is not the climate. It is building an allocation model on numbers that are wrong. Kalb said "the danger is you're using misinformation to build an asset allocation model that potentially could point you in the wrong direction." That can overexpose a fund to risk and damage, and underexpose it to the opportunities in solutions
Kalb's stated goal is mobilizing capital, and he thinks the only argument that moves it is an economic one. Institutions need tools that show adjusting the portfolio reduces risk and improves returns. Plenty of existing models show what the risks are; what is missing is what to do about them
The timescales do not meet. Scientists, Kalb said, "are very comfortable with 30 and 40-year projections." "Investors tend to focus on the next three years." The physical risks of climate will not show up in portfolios for several decades, which is exactly why he thinks allocators managing intergenerational capital have to start modeling now
What he hears from allocators is that they believe in the sustainability issues but still need a financial risk and return case to support the allocation. "We need that case to be able to support our allocating capital into this area."
10. What the NGFS Provides
Dyer asked about the tools, and specifically whether the Network for Greening the Financial System supplies the forward-looking data.
The NGFS models the economy, not the portfolio. Its outputs are macroeconomic — what climate change does to global interest rates, to insurance premiums — and it does not look at asset classes
That is precisely the gap Kalb's work fills. Because capital market assumptions are themselves built out of macroeconomic inputs, the NGFS impacts can be pushed into those building blocks. Burckart's summary — "which can all feed into CMAs, right?" — got a flat "100%" from Kalb
The scenarios are already in their fifth phase, are being revised, and are publicly available for anyone to use. What Kalb's group is discussing with the NGFS is applying the models to asset classes and asset allocation, which is a different exercise
11. Building It Into the Model
Burckart asked Kalb to distill it for listeners: what actually changes between a conventional capital market assumption and a system-level one. He drew the question from the exercise his editor set him on the book he wrote with Steve Lydenberg, which laid out goal setting and asset allocation from a traditional, then an impact, then a system-level perspective.
Kalb's answer is that the adjustment happens at the level of the underlying assumptions, not the benchmark. Beneath every benchmark sit the assumptions that explain why you would hold it and what it should return. Change those and the portfolios built on top change with them
Most institutions are doing the opposite, and Kalb thinks it limits what they achieve. Capital is still deployed against legacy benchmarks that do not price climate or other system-level impacts, and funds layer a net-zero goal or a thematic strategy on top. "What really needs to happen is at the underlying asset allocation level, they need to allocate their assets in a way that makes sense and then go implement the strategies as part of that allocation model."
What that looks like in a portfolio, in Kalb's examples: an allocation on the equity side to adaptation or transition equities; in alternatives, to renewable infrastructure; in fixed income, to SDG bonds. The point of a climate-adjusted CMA is that those allocations can then be quantified rather than asserted
Burckart's term from the chapter for the result is "climate optimized portfolios"
The tool has to make two claims to be useful, in Kalb's framing. First, that the path an institution is currently on is likely to disappoint, with lower returns and higher risks than its own modeling anticipates. Second, that here are the steps that improve the risk and return expectations
12. The Black Elephant
Burckart brought in the insurance industry, and the section turned into the clearest explanation in the episode of why a backward-looking model misses climate.
Burckart's analogy came from an insurance chief investment officer at Allianz who talks about running out of things to insure. The consequence, as Burckart put it, is that "if insurance runs out of things to insure that's a problem for everyone."
Kalb said insurers are the right model because they underwrite the part of the distribution investors ignore. "But insurance companies are mostly concerned with what we call the fat tails." Most modeling effort goes into the thick middle of the bell curve where the probabilities are highest; insurers work on the long, low-probability, high-damage end, because one of those events can end the company
The same logic applies to a pension fund. A low-probability event still cannot be survived: in Kalb's words, you cannot afford to wake up the next day and find the fund's portfolio has blown up
The distribution itself is moving. Kalb called it distributional shift — "the bell curve shifts to the right" as temperatures rise. "So things that before were sort of fat tails off to the right of the curve, they're now included in the more high probability events of the distribution of outcomes in that curve." Dyer had set this up with the chapter's own line: "You talk in the chapter how like yesterday's black swan events could be today's fat tail events."
Burckart asked what a black elephant is, and Kalb defined it. It combines the unpredictability of a black swan with "the elephant in the room that nobody really wants to talk about." Climate qualifies because the direction is known even when the pace is not. "We do know it's happening and occurring."
13. The Collective-Action Trap
Dyer asked whether any asset owners are genuinely putting this into their capital market assumptions, and how effective the alternatives have been.
Kalb's group rates and ranks 300 of the largest allocators and picks out roughly the top 50. Those are the funds he says are seriously trying to build climate into their allocation models rather than running scenarios alongside them
His verdict on progress is incremental change and real frustration. The needle is not moving enough, and there is a collective action problem across most of what needs doing. Allocators are responding by teaming up so their combined assets carry weight
The size of the pool is the argument for bothering. "But I got 300 allocators with 32 trillion of assets. It's an average of about a hundred billion dollars per organization." From that he draws the redirection case: "So just 1% of their assets if it was devoted to a certain area would be you know $30 billion."
Kalb rates stewardship and engagement as important and hard. Those efforts are tough and slow to move the needle, which is why he wants the work done at the allocation-model level — build the architecture first, then implement the specific solutions from the bottom up
14. Arguing With His Co-Author
Burckart asked whether Kalb and his co-author, Paul O'Brien, ever came to loggerheads, given how different their seats are. Kalb said they did.
O'Brien was deputy chief investment officer of the Abu Dhabi Investment Authority when the two met, and is now connected to the Wyoming Retirement System. Kalb was explicit about the disclaimer: "He doesn't in this piece, by the way, let's just make it clear, he's not speaking for Wyoming."
Kalb characterized the difference as one of temperament and geography. "And I think he brings a more, I would say, more conservative perspective on a lot of these issues." Wyoming is a large energy-producing state; Korea, where Kalb worked, is a large energy importer, and Kalb said that produced genuinely different perspectives to debate
What they agreed on is the finding the chapter rests on. "One of the things we noticed was we just felt like the benchmarks that are being used for investing, you know, the big large benchmark indexes that are used to guide investment weren't pricing climate risk properly." Drilling into the CMA level was how they showed it, because the flawed assumptions filter up into the legacy benchmarks
Kalb's process advice from the disagreement: bring in as many different perspectives as possible, and hand the tools you build to outsiders to test drive and criticize before you rely on them
15. Where to Start This Year
Dyer's closing substantive question was practical — what should an asset owner do this year — and Kalb widened it from climate to systemic risk generally.
The first step is the one he had already given: go to the provider and ask what is in the forecast. Most institutions simply take the CMAs they are given and incorporate them. Building your own is possible but resource intensive
Kalb's second step is to stop treating exclusion and return as a trade-off. "We don't need to invest in what I call the bad guys in order to make the appropriate risk-adjusted returns that we need." His examples of the bad guys were companies polluting the environment, using slave labor or engaged in corrupt business practices. "You just don't have to do that."
He argues the legacy benchmark is itself the risk. "So, just sort of blind investing in sort of some of the legacy benchmarks could actually hurt you over the long run." The point is a financial one before it is an ethical one, though he notes both
Asked what one thing he would have every institutional investor do, he named the level rather than the action. Take a better top-down approach to system-level risks, because they are top-down issues, and build them into allocation models. "Think about the fact that we should not be blindly investing in benchmarks that may be including disruptive or non-productive or harmful investments."
16. His Vision for Finance
The episode closed on the show's standing quick-take questions, and Kalb used the last of them to restate what he thinks the job is.
Kalb wants fiduciary duty defined more broadly than risk-adjusted return. "My view is that we need to expand our view of fiduciary duty as mission-driven investors." The test he applies is whether the investing conflicts with the social and environmental conditions the beneficiaries actually live in
His argument for it is self-interested rather than moral. "It's not going to help us if we're investing in things that make a return, but that people don't have air to breathe or water to drink or you won't make those returns for long if that's the case."
His advice to students is unfashionably technical. "You got to learn the fundamentals, the basics of investment of the macroeconomic variables behind it, how you do your calculations, your work, because you need to combine those that skill set to be able to really make a difference." The point being that the sustainability conviction is worth nothing without the modeling ability to act on it
Bonus Insights
Burckart's running joke was that Kalb should follow Mark Carney's career path. Carney ran a central bank in a country he was not from, went home, and became prime minister of Canada; Burckart asked whether Kalb, an American who ran Korea's fund, might do the same. Kalb: "Heck no." He did say he had the privilege of meeting and working with Carney, and called the climate work he has done tremendous
Kalb's book recommendation is about food systems, not finance. "Book I would recommend that I'm reading is called We Are Eating the Earth by Michael Grunwald." He said he is particularly interested in reforming food systems and circularity in economic systems, and how food affects sustainability, affordability, health and climate change
He has put money and time into that himself. Kalb co-founded a company called Bright Feeds, which recycles food waste and converts it into animal feed — "Trying to keep food in the food ecosystem rather than turning it into energy."
The competitive streak came out at the end. "My passion is playing tennis. I compete on the Master Circuit." He is captain of the Maccabi USA masters tennis team, which prompted Burckart to warn Dyer never to bet against him
Kalb's bottom line is that the case for treating climate as an investment risk has to be won inside the return forecast rather than alongside it, because the allocation model an institution builds on that forecast is what actually decides where its money goes.
Products, Companies & Tools Mentioned
Korea Investment Corporation (Korea's sovereign wealth fund, which Kalb put at about $250 billion today and where he spent four years as CIO and deputy CEO)
Responsible Asset Allocator Initiative (Kalb's initiative at the Fletcher School at Tufts, which rates and ranks 300 of the world's largest allocators and names roughly a top 50)
The Investment Integration Project (Burckart's firm, which works with pension funds on integrating system-level investing into their existing processes)
Network for Greening the Financial System (The central-bank association whose three climate scenarios the study used; its models are macroeconomic rather than asset-class based, and are now in their fifth phase)
The Predistribution Initiative (Delilah Rothenberg's organization, which treats inequality rather than climate as the defining systemic risk; Rothenberg worked on the CMA research before stepping down to focus on inequality)
BlackRock, Mercer and Northern Trust (Named by Kalb as examples of the large asset managers and investment consultants whose published capital market assumptions the study aggregated)
Abu Dhabi Investment Authority (Where Kalb's co-author Paul O'Brien was deputy CIO, and where the two first worked together)
Wyoming Retirement System (Where O'Brien is now a trustee; Kalb was explicit that O'Brien is not speaking for Wyoming in the chapter)
Allianz (Burckart cited its chief investment officer on the insurance industry running out of things it can insure)
Bright Feeds (The food-waste-to-animal-feed company Kalb co-founded, which he described as keeping food in the food ecosystem rather than turning it into energy)
Maccabi USA (Kalb captains its masters tennis team and competes on the Master Circuit)
Books & Resources Mentioned
The Handbook of System-Level Investing (The book this episode's series is built around; Kalb and Paul O'Brien wrote chapter 14, on capital market assumptions, and Burckart is one of its editors)
We Are Eating the Earth – Michael Grunwald (Kalb's current read and his recommendation, on food systems, circularity and their effect on climate)
21st Century Investing – William Burckart and Steve Lydenberg (Burckart's earlier book with Steve Lydenberg; its editor made them lay out goal setting and asset allocation from traditional, impact and system-level perspectives, which is where his question to Kalb came from)
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