How Climate Risk Could Impact Investments in 2025

2024 was the warmest year on record. Extreme weather that accompanies a warming planet has also become the new norm, according to industry experts that shared their insights on the recent Data Minds: Navigating Physical Climate Risk Disruptors. The World Meteorological Organization, which attended the UN Climate Change Conference COP29 in December of last year, agrees, stating in a report that “The record-breaking rainfall and flooding, rapidly intensifying tropical cyclones, deadly heat, relentless drought and raging wildfires that we have seen in different parts of the world this year are unfortunately our new reality and a foretaste of our future.”¹

The panelists at Data Minds: Navigating Physical Climate Risk Disruptors identified a few reasons investors may consider integrating physical climate risk data into their investment strategies in an attempt to hedge the risk of these more frequently occurring events.​

• Unprecedented events are the new normal: Floods, droughts, and extreme weather are disrupting businesses worldwide. Relying solely on historical data for risk assessment is no longer enough.

• Supply chain disruptions: Climate events can have cascading economic effects. For example, a drought in Taiwan impacted global chip production, affecting industries from auto manufacturing to consumer electronics.

• The need for context: Raw data alone is not enough. Understanding sector-specific risks, geographic nuances, and the interplay between transition and physical risks is crucial for informed decision-making.

• Regulation is increasing: Regulators are pushing for greater transparency and standardization in physical climate risk data, but the landscape is still evolving.

The panelists also discussed how investors may be able to navigate these challenges and stressed the importance of:​

• Dynamic, stochastic data: Data that captures the uncertainty of climate change and accounts for the increasing frequency of extreme events.

• Integrated risk assessment: Considers the interconnectedness of physical risk, transition risk, and supply chain vulnerabilities.

• Granular asset-level data: Detailed information about the location and vulnerability of physical assets, including buildings, infrastructure, and supply chain nodes.

• Sector-specific expertise: Understanding the unique risks and vulnerabilities of different sectors, including asset-heavy industries, agriculture, and tourism.

The Bottom-Line

Climate change is a reality that comes with major human and economic implications. As such, investors may want to consider how these physical risks as well as regulatory changes impact their investments and the strategies they use to navigate these challenges.

1 2024 is on track to be hottest year on record as warming temporarily hits 1.5°C, World Meteorological Organization, November 11, 2024, https://wmo.int​

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