Overview
The 1.5°C threshold is the most politically and financially loaded number in climate science. It represents the aspirational upper limit set by the Paris Agreement in 2015, the point beyond which the world’s governments agreed warming should ideally not go. Breaching it does not mean climate collapse, but it does mark a meaningful step-change in the severity and frequency of physical climate impacts.
In 2024, average global temperatures exceeded 1.5°C above pre-industrial levels for the first time on an annual basis. The climate science community is clear that a single year above the threshold is not the same as a permanent breach, the threshold refers to long-term average warming. But the milestone signals that the world is tracking above the most ambitious pathway and that the window for avoiding permanent breach is narrowing rapidly.
The IPCC has produced extensive analysis comparing a 1.5°C world with a 2°C world. The differences are not marginal. At 2°C, extreme heat events that occur once per decade under pre-industrial conditions occur roughly 5.6 times as often. Coral reef systems face near-total collapse. Hundreds of millions more people face water stress. Adaptation limits are crossed for more communities, especially in low-lying coastal areas and sub-Saharan Africa.
Why 1.5°C Matters to Finance
The threshold structures the risk landscape of Climate Finance in a fundamental way. Physical climate risk is driven by temperature, the higher the warming, the greater the asset damage, insurance losses, productivity impacts, and supply chain disruption. Every fraction of a degree matters because the relationship between warming and physical impacts is not linear; it accelerates.
Transition risk runs in the opposite direction but is equally sensitive to the pathway. The faster and more aggressively the world acts to stay below 1.5°C, the more disruptive the economic transition. The more delayed the action, the worse the eventual physical damages, but the more gradual (or chaotic) the transition. This is the core trade-off at the heart of climate scenario analysis: orderly transition preserves the temperature target but front-loads economic disruption; disorderly delay creates worse long-term outcomes for both physical and transition risk.
Stranded Assets calculations are highly sensitive to the temperature pathway assumed. Assets viable in a 2°C world may be unviable in a 1.5°C world, because the latter requires faster and deeper emissions cuts that strand carbon-intensive capacity sooner.
The 1.5°C Pathway and Emissions Budgets
The concept of a “carbon budget”, the total amount of CO₂ that can be emitted while keeping warming below a given threshold, is the operational link between the 1.5°C goal and emissions reduction targets. The IPCC estimates that, to have a 50% probability of limiting warming to 1.5°C, the world can emit roughly 500 billion tonnes of CO₂ from 2020 onwards. At current emission rates, that budget is exhausted within roughly a decade.
This budget framing directly informs how science-based targets are set. A company’s net zero commitment is only consistent with 1.5°C if its emissions reduction trajectory is aligned with a share of the remaining global carbon budget. This is what distinguishes a science-based target from an aspirational one.
Path-Dependence
How the world reaches any given temperature outcome matters almost as much as the outcome itself. A pathway that involves a gradual, policy-led transition to net zero by 2050 creates manageable transition risk. A pathway that delays action and then scrambles creates both severe physical risks (from earlier and greater warming) and severe transition risks (from sudden, disorderly policy intervention). This path-dependence is central to the scenario analysis frameworks used by TCFD and embedded in IFRS S1 and S2.