Extreme weather events and natural disasters have become more frequent and intense; the number of floods has quadrupled since 1980 and doubled since 2004. Properties that appear attractive today could be underwater or reduced to ash before their return on investment is fully realized. Yet investors struggle to quantify the severity of long-term climate risks; they seek both a better understanding of their exposure and improved ways to manage it.

For most of the past two decades, a benevolent relationship between bonds and equity has prevailed as a central pillar of asset allocation. Falling equity markets consistently coincided with falling interest rates, providing an effective hedge between bond and equity allocations. Now, talk of weaker central-bank policy or a risk of deflation has many asset allocators focused on the future of the rates-equity correlation.