Evidence of the financial materiality of physical climate risk continues to mount as extreme weather events become more frequent and severe, noted investors, lenders, insurers and others throughout the week. An analysis published by MSCI, for example, found that physical climate risk is increasingly reflected in credit markets, where investors have demanded higher returns from companies more exposed to hurricanes, and that physical risk is associated with weaker profitability.
The research suggests that understanding the exposure of portfolios or loan books to physical hazards starts with location. Following MSCI’s agreement to acquire First Street, a leading provider of physics-based climate risk data and analytics for every property in the world, MSCI clients will gain access to more granular, asset-level assessments of physical climate risk.
The week’s heatwave illustrated another finding from the data — that the risk of business interruption from physical climate hazards is 14 times greater than the risk of asset damage.2 Companies are now more than 6.5 times as likely to issue a profit warning following an extreme weather event than they were two decades ago, according to an analysis by First Street.
Data centers offer a striking example. Nearly 80% globally face elevated exposure due to acute climate hazards such as flooding, extreme winds and wildfires that can disrupt operations, increase downtime, and drive insurance and repair costs.3 As Matthew Eby, First Street’s founder and CEO, observed this week, “The world is building its most capital-intensive infrastructure where operating conditions are hardest, not easiest, and committing to those sites for decades.”
