Physical Risk is Rising, Investors Have the Tools to Manage It
“Physical risk is seeping into every portfolio, loan book and property insurance policy, exposing the vulnerability of assets and supply chains, and it’s happening in real time.”
September marks the end of summer in the Northern Hemisphere and with it another season of extreme weather amplified by a warming world.
Floodwaters in Texas and Pakistan caused billions of dollars’ worth of losses and claimed hundreds of lives.1 Record heat in Japan has threatened to damage the rice harvest and drive up prices as public frustration with the cost of living mounts.2 In the U.K., where I live, this summer was the hottest in 141 years of record-keeping.3
I’ve spoken with corporate leaders in the U.S., investors in Europe and policymakers across Asia, and all are grappling with the same reality. Physical risk is seeping into every portfolio, loan book and property insurance policy, exposing the vulnerability of assets and supply chains, and it’s happening in real time.
From Texas to Tokyo, investors, lenders, insurers and corporate risk managers are grappling with the challenge of how to measure and manage physical risk, quantify financial losses and report such risks to stakeholders.
But, if there is good news, investors now have the tools to help them minimize exposures to physical risk and come out ahead.
Physical risk doesn’t care where the CEO sits. Understanding the variability of exposure across an investment portfolio depends on analyzing company facilities and dependencies at very fine geographic scales.
Investors also must look past headlines about dramatic events to see the slow-burn risks that silently erode value year after year. Acute hazards like wildfires and hurricanes may dominate the news, but chronic risks such as extreme heat and record rainfall cause the lion’s share (86%) of annual losses.
There is also value in analyzing both the hazards companies face and their ability to adapt. Our company physical risk model shows that the distribution of average annual losses concentrates in a relatively few number of firms.
Source: MSCI ESG Research, as of Aug. 22, 2025.
At the same time, only about half (56%) of the companies say they’ve incorporated exposure to physical risk into their business and risk-planning processes.4 Monitoring and engagement can help investors reduce volatility and minimize exposure.
Physical risk hits companies in the present, not in a hypothetical future. Analysis by MSCI shows that chronic and acute physical risks such as extreme heat and flooding could cost the largest listed companies globally USD 1.3 trillion over the next year based on estimates of damage to assets and lost revenue opportunities.
While the transition to a low-carbon economy involves scenarios that unfold over decades, assessing physical risks demands a much shorter horizon. In a survey by the MSCI Institute, 57% of investors and risk professionals said that physical risks are creating economic fallout sooner than anticipated.
Scenarios for addressing physical risk needn’t look beyond a few years. Universities Superannuation Scheme (USS), the U.K.’s largest private pension system, developed four scenarios for 2030 to assess climate-related hazards across its portfolio.5
USS divides the world into 1-kilometer grid cells, overlaying GDP data with the likelihood of five acute hazards (river floods, wildfires, heatwaves, tropical cyclones and drought) and one chronic hazard (the impact of heat stress on labor productivity) within each cell.6 This approach allows assessment of location-specific exposures, a country’s vulnerability and its readiness to improve resilience. It also enables USS to assess the interplay between physical risk and other macroeconomic drivers.
Losses from physical risk are growing in frequency, severity and duration, making assets harder to insure. Premiums for physical-risk and natural-catastrophe protection are set to rise 50% by 2030, reaching USD 200-250 billion globally, according to data from Howden and Boston Consulting Group.7 Roughly two-thirds of natural-catastrophe losses already go uninsured.8
Some companies are adapting. The utility PG&E Corp., which serves about 16 million people throughout California, stopped purchasing third-party wildfire coverage, instead setting aside its own funds.9 Others are trying parametric insurance, which ties liability to measurable parameters such as rainfall volume.
Unpredictability compounds the challenge. Many projections, for example, underestimate extreme rainfall and flood risk along the U.S. Gulf Coast.10 As my colleague Rick Bookstaber, a former chief risk officer, notes, “For physical risk, we can't rely on history, and we might not even recognize the risks given that we have not seen them before.”
Insurability can mask systemic risk. While self-insurance saves companies the cost of premiums, it can strain cash flow after large liabilities. That in turn can impact companies’ creditworthiness, which determines their cost of capital. If the liabilities become large enough, they can also impact valuations, dragging down share prices. Still other firms will be unable to either transfer or absorb such liabilities, jeopardizing their ability to operate.
The reality of a warming world means that physical risk is unavoidable. Companies and investors alike will continue to confront the financial and operational implications of severe weather and climate-induced disruptions. Navigating such risks starts with the ability to see them clearly.
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1 “Punjab floods washed away thousands of villages and farms; now the devastation threatens Pakistan's economy,” Reuters, Sept. 1, 2025. See also, “Texas flash flood tragedy causes an estimated $18 billion to $22 billion in total damage and economic loss,” AccuWeather, July 9, 2025.
2 “Japan sets record high temperatures, worries mount over rice crops,” Reuters, Aug. 5, 2025.
3 “Summer 2025 is the warmest on record for the UK,” Met Office, Sept. 1, 2025.
4 Data as of August 2025.
5 TCFD Report 2025, Universities Superannuation Scheme, 2025.
6 Ibid.
7 “The bigger picture, The $10 trillion role of insurance in mobilizing the climate transition,” Howden and BCG, June 24, 2024.
8 Sam Meredith, “Why insurers worry the world could soon become uninsurable,” CNBC.com, Aug. 8, 2025.
9 Mark Chediak, “Wildfire Threats Make Utilities Uninsurable in US West,” Insurance Journal, June 25, 2024. For customers served by PG&E Corp., see “Company Profile, Fast facts about PG&E,” available at www.pge.com.
10 Savannah K. Jorgensen and John W. Nielsen-Gammon, “Nonstationarity in Extreme Precipitation Return Values along the U.S. Gulf and Southeastern Coasts,” Journal of Hydrometeorology, May 21, 2024.
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