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Weathering Physical Climate Risks: A Guide for Financial Professionals



The following content is sponsored by MSCI

Weathering Physical Climate Risks

In 2023, we experienced Earth’s hottest days on record.

July had 21 of the hottest 30 days ever recorded. The hottest day, July 6, 2023, was 17.2℃ (62.9℉) compared to the average since 1979 of 16.2℃ (61.2℉).

How could a changing climate create climate risks for your company or portfolio? In this graphic from MSCI, we explore how you can measure your risk, along with the regions and sectors that could be most affected.

Types of Physical Hazards That Create Climate Risks

As the climate changes, scientists predict that physical hazards like fires and floods will become more frequent and intense. There are two types of hazards that lead to climate risks.

Events drive acute risks, which can cause business interruption and asset damage. 

HazardHow it’s Measured
Fluvial floodingFlood height (m) of a 100-year return period flood event
River low flowDays of flow with less than 2.5% discharge of a 100-year return period
WildfiresFire probability in % of a 1-year return period
Coastal floodingFlood height (m) of a 100-year return period flood event
Tropical cyclonesWind speed (m/s) of a 100-year return period tropical cyclone

On the other hand, long-term shifts drive chronic risks and can cause business interruption.

HazardHow it’s Measured
Wind gustsDays with wind speeds above 24 m/s
Extreme heatDays with temperatures above 30°C
Extreme coldDays with temperatures below 0°C 
Heavy rainDays with rainfall above 2.5 mm/hr
Heavy snowfallDays with snowfall above 5 cm/day

Depending on the type of hazard, certain regions are more susceptible than others.

A Breakdown by Region

Forecasting the geographic exposure to extreme heat over the next few decades can help identify vulnerable areas. 

Below, we show the 2050 projections for extreme heat percentiles for select areas. The projections assume a global average temperatures rise of 3℃. The higher an area’s number, the greater exposure to extreme heat.

AreaExtreme Heat Percentiles, 2050P
🇬🇧 London, UK11
🇨🇭 Zürich, Switzerland15
🇫🇷 Île-de-France, France (incl. Paris)23
🇩🇪 Berlin, Germany23
🇨🇦 Ontario, Canada (incl. Toronto)30
🇺🇸 New York, U.S. (incl. New York City)40
🇯🇵 Tokyo, Japan47
🇦🇺 New South Wales, Australia (incl. Sydney)47
🇨🇳 Shanghai, China61
🇮🇳 Maharashtra, India (incl. Mumbai)93

Select countries are the most heavily weighted in the MSCI ACWI IMI index. We selected the most populated cities within these countries.

Areas that are further north are generally projected to have lower exposure, but even these areas will not be immune to climate risks. For example, Chicago’s potential extreme heat exposure in 2050 could match the level Shanghai had in 2021 if global temperatures rise by 3℃.

Like extreme heat, all physical hazards can lead to additional costs for a company. But which sectors could be most affected?

A Breakdown by Sector

Research suggests that the utilities sector is at risk of the highest additional costs relative to company valuations, while the IT sector has the least risk.

SectorPhysical Climate Value-at-Risk
Real Estate-10.2%
Consumer Staples-7.9%
Communication Services-6.2%
Consumer Discretionary-5.8%
Health Care-3.4%

Physical Climate Value-at-Risk is a metric that quantifies the potential financial risks or benefits that a company might experience due to its exposure to physical climate-related hazards. It is measured as a percent of current company valuations.

Due to their fixed locations, real estate portfolios can also be vulnerable to physical risks.

Gauging Your Exposure to Physical Climate Risks

Scientists predict that physical climate risks will increase, and they will affect all regions and businesses differently. 

MSCI’s physical risk data can help asset managers, banks, insurers, and companies assess their exposure.

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Understand your risks with MSCI’s physical hazard metrics.

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