Financial markets may still be underestimating the investment impact of extreme weather, despite listed companies facing an estimated $1.3trn (£1trn) in losses over the next year alone, according to a new report from the Sustainable Markets Initiative (SMI).
The report, developed by Marsh Risk along with Impax Asset Management’s Sustainability Centre, argues that physical climate risks are already affecting portfolios through asset damage, supply chain disruption, and impaired company performance – but are not yet being fully reflected in valuations.
Its warning builds on concerns raised earlier this year by the Institute and Faculty of Actuaries and the University of Exeter, which said the economic impact of climate change had been systematically underestimated and cautioned that conventional modelling was failing to capture the full scale of downside risk.
“Extreme weather events are already generating significant economic losses, and the scale and complexity of these risks is increasing.”
Callum Ellis, Marsh Risk
The SMI report said investors increasingly recognise that extreme weather is a near-term financial issue rather than a distant one. It said global listed companies could face $1.3trn in losses over the next year from direct damage and operational disruption.
It also warned that current tools often fail to capture the full picture. According to the report, business interruption losses from Hurricanes Sandy and Harvey were 800% to 900% higher than property damage. This means investors may need to draw on multiple climate scenarios and analytical approaches to assess potential vulnerabilities.
Callum Ellis, head of climate resilience at Marsh, said: “Extreme weather events are already generating significant economic losses, and the scale and complexity of these risks is increasing.
“Continued advances in risk analytics, modelling and data will be essential to help investors, insurers, and businesses better understand their exposure and make more informed decisions about managing physical climate risk.”
“As physical climate risks intensify, understanding how these risks translate into portfolio impacts will be essential for long-term investment decision making.”
Ian Simm, Impax Asset Management
The report draws on two SMI roundtables involving organisations with more than $20trn in assets under management or advisement and sets out five recommendations for asset owners and managers.
It urges investors to act now to enhance investment processes and consider extreme weather risk, and ensure they can access or develop appropriate tools and useful datasets. They should also make decisions that prioritise resilience, diversification and flexibility in strategic asset allocation and investment mandates.
On top of this, the report encourages institutions to use engagement with investee companies to assess vulnerability and preparedness, as well as working to tackle both portfolio and systemic risks through better information, collaboration, and policy advocacy.
Ian Simm, founder and chief executive of Impax Asset Management, said: “Extreme weather is increasingly becoming a material financial issue for investors. As physical climate risks intensify, understanding how these risks translate into portfolio impacts will be essential for long-term investment decision making.”
