Beyond mitigation: How investors can navigate real-world climate risk

It hasn’t been long since we shared the first article in our series on growing climate risks and adaptation opportunities. In that short time, several climate hazards have tested the resilience of businesses across the globe: 

• Cyclone Narelle disrupted production at Australia’s three largest liquified natural gas (LNG) plants, which currently provide more than 8.0% of the world’s supply. The storm exacerbated a severe supply crunch caused by the Middle East conflict and pushed LNG prices in Asia to multi-year highs. 

• A scorching heat wave on the West Coast set more than 1,500 temperature records across 11 states. California-based employers were mandated to take steps to prevent heat illness, including providing designated cool-down areas and preventative rest breaks. 

Investment management firms often dedicate teams of analysts to the study of small changes in Federal Reserve policy or corporate earnings forecasts, but climate events like these rarely factor into formal investment analysis. 

We believe that dynamic is likely to change in the coming years, particularly in listed equity and fixed income markets. The increasing abundance of geospatial data and advances in climate risk modelling will make it far easier for investors to assess their exposure to the physical risks of climate change and adjust their portfolios accordingly. 

Assessing vulnerability with geospatial data 

Geospatial data contains location-specific information that can be used to measure how climate hazards could threaten individual assets. This enables granular risk measurement—from individual properties to entire supply chains—and informs risk management. These models tend to incorporate forward-looking assumptions rather than relying solely on historical events, which overlook rapidly shifting climate conditions and may underestimate risk.

For example, investors expect municipal bonds to offer stability to portfolios given their relatively low default risk. However, some local governments currently face a mounting fiscal time bomb as climate hazards drive up insurance costs, threaten property values and squeeze municipal budgets. As a result, geospatial data is quickly becoming a critical input for credit analysts when determining the risk-return profile of individual bonds.

Exhibit 1 highlights how climate hazards can be visualized for municipal markets using data from BloombergNEF. Counties are color-coded based on their expected physical risk exposure and relative preparedness. Those with “high risk, low resilience” may be expected to experience deteriorating fiscal health, reduced creditworthiness and higher interest rates in the long term.

Exhibit 1: Mapping municipal climate risk

As of December 31, 2022. Sources: BloombergNEF, Bloomberg Intelligence, FEMA, US Treasury Department, FHFA, 2022 Census

This is precisely what happened in Corpus Christi, TX, a city of roughly 317,000 people in a “high risk, low resilience” county. In December 2025, Moody’s downgraded the city’s bond ratings due to a looming water supply crisis and a tight timeframe to rectify it. Corpus Christi officials project that demand for water will outpace supply by mid-2027 and have severely limited new construction. Moody’s lowered the city’s general obligation and sales tax revenue bond ratings by two notches, raising long-term borrowing costs. Because bond prices and interest rates move in opposite directions, strategies that owned these bonds experienced relative losses.

Testing portfolios with climate scenario analysis

Climate scenario analysis is a methodical way to evaluate how various future climate conditions—ranging from rapid progress on decarbonization to business-as-usual emissions—could impact economic variables and investment portfolios. Today, the overwhelming majority of climate scenarios assume global temperature increases between 1.5 and 3.0 °C above pre-industrial levels. Scenarios can also account for various policy regimes, technological innovations and specific extreme weather events. Investors can test portfolio resilience against different scenarios to inform decisions about asset allocation, mitigate stranded asset risk, or engage companies’ executive management as shareholders.

We ran a Climate Value at Risk (Climate VaR) model for the MSCI US IMI Utilities 25/50 Index (the Index) as an illustrative example. Climate VaR is used to estimate the maximum decline of a portfolio’s value given a stated climate scenario and confidence level. It is an adaptation of the traditional VaR measure, which has long acted as a forward-looking “what if” tool for financial professionals. In this case, we sought to estimate the maximum drawdown for the Index given an “aggressive” physical risk scenario. ¹ As Exhibit 2 shows, the net asset value of the Index is expected to decrease by 16.9% in this scenario, which is not surprising given utilities’ significant fixed assets.

Exhibit 2: Climate VaR analysis for the MSCI US IMI Utilities 25/50 Index

As of February 28, 2026. Source: MSCI

Turning data into investment decisions

How can investors use this information to potentially enhance the risk-adjusted returns of their portfolios? First, they would need to confirm which extreme weather events would likely be financially material to the utilities sector. The model’s output found that tropical cyclones and extreme heat are expected to account for greater than 60% of losses. From here, investors could dive deeper into their underlying utilities holdings to determine which ones operate in higher-risk regions. This analysis can be supplemented with geospatial data that provides the coordinates of specific assets like power generation plants and transmission lines. If investors believe that affected companies’ valuations are underestimating physical risk exposure, they can underweight the holdings accordingly.

We believe it is crucial to understand how climate scenario analyses are constructed, the uncertainties inherent in model design and the associated implications for outputs. The assumptions underpinning these frameworks can materially affect results. Therefore, we believe climate scenario analysis should represent just one of several inputs when considering physical risk exposure within strategies.

Addressing climate risk through shareholder engagement

Climate risk assessment and management need not remain in the domain of spreadsheets and quantitative models. Shareholders are part owners of corporations with the ability to push executive management to publish robust climate disclosures, strengthen supply chain resilience and manage carbon transition impacts. These efforts are generally collaborative but can ultimately result in the filing of a resolution for inclusion on a company’s annual proxy statement.

Shareholders interested in directly engaging with executive management on physical climate risk may consider the following questions as a starting point:

1. Where do you anticipate climate change affecting the growth or margins of your business due to supply chain shocks or changes in end-market demand?
2. How has the company updated its business continuity plans to ensure operational resilience? What specific investments are being made to harden infrastructure or adapt operations against extreme weather events?
3. Do any of your products/services have the potential to help customers adapt to the changing climate?

Identifying climate risks and adaptation opportunities

The huge and growing price tag associated with physical climate risks is becoming more apparent by the day. Geospatial data, scenario analysis models and shareholder engagement help investors assess these risks as they build portfolios and seek to generate enhanced risk-adjusted returns.

As the last of the shareholder engagement questions alluded, investors should not view climate adaptation solely from a downside perspective. There will be clear corporate winners and losers as extreme weather events intensify. Investors will have the opportunity to own companies that provide products and services addressing a rapidly warming world.

 

 

 

 

1. MSCI defines an “aggressive” physical risk scenario as “extreme weather corresponding to the 95th percentile of the cost distribution from climate-related events.”