Why a short, sharp climate shock affects your pension more than a slow, looming threat

When severe floods struck Valencia in late 2024, the damage quickly spread beyond the affected neighbourhoods. Infrastructure was disrupted, insurance claims surged and supply chains were hit across the region. Within days, the financial implications were clear. Events like these illustrate how sudden climate shocks can rapidly enter financial markets.

For many people, this matters more than they might think. Pension funds, insurance portfolios and long-term savings are heavily invested in companies, infrastructure and energy systems exposed to climate risk. As extreme weather events become more frequent and environmental pressures intensify, the way financial markets react to climate risks increasingly affects the economic security of savers.

Yet not all climate risks provoke the same reaction from investors. Sudden events such as floods, storms or even climate-related lawsuits (such as the landmark case brought by green groups against oil giant Shell in the Netherlands) can quickly influence market expectations.

Slower environmental changes – things like rising sea levels, prolonged drought or gradual ecosystem degradation – rarely produce the same immediate financial response. But their long-term economic consequences may ultimately be just as significant.

Understanding why financial markets react unevenly to different types of climate risk leads to an emerging area of research known as neurofinance. This field combines insights from neuroscience and finance to explain how investors evaluate uncertain future outcomes.

Although markets are often described as systems driven by data, models and algorithms, they ultimately reflect the judgements of people – investors, analysts and portfolio managers. Their decisions depend on how risks are perceived and evaluated. Neurofinance research suggests that these decisions are influenced by how the brain processes time, uncertainty, attention and risk.

More distant, but no less risky

One study showed that people often react more strongly to immediate and emotionally vivid threats than to slower or more abstract risks. This can be true even when the long-term consequences of those slower risks are just as serious.

This pattern is not limited to financial decisions. People may respond quickly to an acute danger such as a fire alarm or a storm, while slower but potentially serious risks can attract less urgent responses. In other words, risks that are visible, concrete and near-term tend to command more attention than those that unfold gradually over long periods.

This does not mean that long-term risks are ignored, but it may mean that their influence on decisions emerges more slowly.

This difference in attention is often described using the concept of “salience” – how strongly a particular signal stands out at the point where a decision is made. Risks that are vivid, identifiable and easy to explain are more likely to enter discussions about valuation and investment strategy. More distant or complex risks may receive less attention, even when their potential economic impact is large.

Climate change provides a clear illustration of this dynamic. After all, different types of risk vary significantly in how salient they appear. Some risks emerge suddenly. New laws or regulations, carbon-pricing policies or litigation can quickly alter the outlook for companies and industries.

Because these developments resemble familiar economic shocks, they often attract investors’ attention immediately. Other risks – rising temperatures, shifting rainfall patterns and long-term environmental degradation – typically unfold over decades. Their effects may be significant but are often harder to link to a single moment or event. As a result, they can appear more abstract in day-to-day investment discussions.

The key difference may lie less in the objective scale of these risks than in how easily they capture people’s attention. Sudden events generate clear signals that investors can process quickly.

This helps to explain why markets sometimes appear highly reactive to climate-related headlines while adjusting more slowly to deeper environmental trends.

For long-term investments such as pension funds, this uneven response presents an important challenge. Pension portfolios are designed to manage risks over decades. Yet financial markets often react most strongly to events that occur suddenly. As a result, portfolios may adjust quickly to regulatory changes or litigation and more gradually to environmental pressures that build over time.

Research also suggests that investors’ views about climate risk do not always translate directly into investment decisions. Surveys indicate that many investors recognise the financial importance of climate change, yet portfolio allocations vary widely. Economists often describe this as the difference between stated views and revealed behaviour in financial decision-making.

Institutional structures within financial markets may reinforce these patterns. Investment managers are frequently assessed on quarterly performance and benchmark comparisons. These incentives naturally draw attention to risks that influence markets in the near term. Slower-moving risks may receive less focus in day-to-day portfolio decisions.

None of this implies that markets are ignoring climate change or behaving irrationally. Financial markets reflect the decisions of millions of individuals and institutions operating under uncertainty and time pressures. But insights from neurofinance suggest that the way risks capture people’s attention influences how quickly they affect decision-making.

Understanding how attention and perception shape financial decisions may help to explain why markets sometimes react dramatically to climate headlines while adjusting more slowly to long-term environmental change. This is a pattern that matters for investors, policymakers and pension-holders alike.

Narmin Nahidi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.