By Rumi Mahmood
LONDON, November 27, 2025 — Physical climate risk has become one of the most consequential forces shaping global markets. What once appeared as an external environmental issue now registers directly in valuations, earnings and capital flows. The physical location of assets, where factories operate, data centres cool and supply chains connect, has become a determinant of financial performance.
At the same time, the structure of climate finance is evolving. Investment that once focused almost exclusively on mitigation now shares attention with adaptation and resilience. As of September 2025, public climate-themed funds held about US$ 625bn in assets. These funds have grown rapidly in recent years, reflecting investor confidence that the energy transition can deliver both growth and returns.
Yet the vast majority of this capital still targets emissions reduction, not climate adaptation. Private capital remains essential, but governments and development finance institutions continue to dominate adaptation finance. These public actors fund flood defences, water systems and resilient infrastructure projects that rarely fit the mandate of listed equity investors. In contrast, public-market instruments tend to reward mitigation outcomes such as lower emissions, while the economic benefits of resilience, avoided losses and operational continuity remain under-recognised.
Note: Public funds data as of 30 September 2025. Private funds data as of 30 June 2025. Public funds include equity and fixed income and mutual funds. Private funds include private equity, private credit and private real assets funds.
Bridging this divide has become a pressing challenge for markets. As physical hazards grow more frequent and severe, investors and issuers are being forced to confront how exposure translates into real financial outcomes. The distinction between climate transition and physical risk is blurring, with capital beginning to flow towards both decarbonisation and adaptation.
The mounting cost of a warming world
The financial implications of climate hazards are now quantifiable. The world’s listed companies could face total losses of about US$ 1.3tn from physical climate hazards over the next year, according to MSCI analysis. These losses include direct damage to assets and indirect effects such as revenue disruption.
While dramatic events such as hurricanes and wildfires attract attention, chronic hazards like extreme heat, heavy rainfall and flooding account for 86 percent of projected losses. These slow-moving, cumulative risks now represent the bulk of climate-related financial damage. For investors, this marks a major shift. Physical risk is no longer episodic. It has become a persistent driver of value erosion, credit stress and market volatility.
Long-term data reinforce this trend. The number of major hurricanes has risen steadily over the past four decades, while extreme heat events have become more frequent in every region. Even without new shocks, a warming baseline is already straining infrastructure, lowering labour productivity and disrupting supply chains. The result is higher insurance costs, tighter credit and increasing risk premia for vulnerable assets.
MSCI’s event-based analysis shows that these risks are already priced by markets. Firms with assets located in hurricane paths underperformed their peers even after adjusting for market and sector factors. Those with higher concentrations of exposed assets saw steeper declines. Although hurricanes provided a clear test case, the pattern holds across hazards. Localised climate exposure increasingly drives financial underperformance across industries.
A systemic portfolio issue
The implications extend beyond individual firms. Physical risk has become a systemic factor influencing global portfolios. In major equity indices, exposure to climate hazards is concentrated among the world’s largest companies. During the 2022 hurricane season, more than half of MSCI ACWI Index constituents had at least one asset in an impact zone, representing about three quarters of total market capitalisation.
Beyond equities, insurance and credit markets are already adjusting. Reinsurers have raised premiums or withdrawn coverage from high-risk regions, while lenders are reassessing collateral values for exposed assets. MSCI research on the US mortgage and residential mortgage-backed securities markets highlights a new dimension of insurance stress.
In high-hazard regions, where expected annual loss rates exceed 30 basis points, property-insurance non-renewal rates have reached 1.6 percent, twice those of lower-risk areas. Average premiums have risen in most regions but stagnated in the highest-risk zones, signalling potential adverse selection and inadequate coverage for climate-exposed properties.
As coverage becomes more expensive or unavailable, uninsured losses increasingly fall on corporate and household balance sheets, amplifying the financial materiality of physical risk. For investors, this means the risk cannot be diversified away through sector allocation alone. It is embedded in the physical footprint of the global economy. Only granular, asset-level data can reveal where vulnerability and resilience truly lie.
Corporate adaptation: resilience becomes strategy
Corporate strategies are beginning to reflect this new reality. According to the MSCI Institute’s Corporate Resilience Survey of more than 500 listed and unlisted companies worldwide, 84 percent said that severe weather events had disrupted operations or raised costs. Two-thirds reported negative effects on employee wellbeing, and one-third cited higher insurance premiums.
As a result, adaptation is shifting from a defensive measure to a strategic one. Companies are investing in flood-resistant infrastructure, modernising grids, strengthening logistics and diversifying suppliers. Many are embedding climate-risk metrics into enterprise planning and insurance decisions.
Shorter planning horizons highlight how immediate the challenge has become. Two-thirds of companies assess climate risks over a two- to five-year timeframe, aligning with business cycles rather than distant scenarios. Firms that have already experienced disruption are far more likely to have upgraded facilities, improved logistics or invested in real-time monitoring.
Governance is evolving in parallel. Many companies now link executive pay or board oversight to climate-risk management. Nearly nine in ten consult insurers or risk professionals to assess vulnerabilities, while six in ten engage climate scientists or engineers.
The benefits of resilience investment are becoming tangible: 82 percent of companies report measurable gains from their adaptation programmes, including improved credit access, lower insurance costs and greater investor confidence. Markets are beginning to distinguish firms that manage physical risk proactively as better managed and less volatile. Resilience is emerging as a marker of corporate quality.
Climate finance is expanding from transition to transformation. Investors are starting to view resilience not as a secondary issue but as a foundation of long-term value. Physical risk is now measurable, financially material and systemic. Integrating it into investment and corporate decision-making is essential for protecting portfolios and ensuring that capital supports both mitigation and adaptation.
The next phase of climate finance will require dual forms of capital: one that accelerates decarbonisation and another that strengthens societies and economies against physical risk. In that convergence lies the new frontier of sustainable finance.
Rumi Mahmood is Executive Director of the MSCI Institute.
https://thecooperator.news/uganda-hosts-annual-climate-finance-conference-in-kampala/
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