Introduction: The financial impacts of physical climate risks

The report explains that physical climate risks are already material to economic performance and asset values. Extreme weather events are increasing, with Europe incurring €13.4 billion in losses in 2023. Macroeconomic analysis indicates that a 1°C rise in global temperature could reduce global GDP by around 12% at peak. At company level, around two-thirds of major global firms have at least one asset exposed to high physical climate risk. Without adaptation, these risks could erode up to 28% of real asset values annually by the 2050s. Impacts are systemic, affecting supply chains, labour productivity and infrastructure.

Challenges in mobilising private finance for adaptation and resilience

Despite rising risks, climate finance remains heavily weighted towards mitigation, which accounted for nearly 90% of flows in 2021–22. Annual adaptation finance needs in developing countries are estimated at US$194–366 billion. Investors face persistent barriers, including limited asset-level data, inconsistent modelling approaches, and mismatches between climate scenarios and investment time horizons. These constraints contribute to the underestimation of physical climate risks in portfolios.

How to use this guide

The guide targets listed equity and debt portfolios, where physical climate risk integration is less mature than in real assets. It is structured around two parts: embedding physical climate risks across the investment process, and engaging with the enabling environment. The framework is intended to be flexible, allowing investors to adapt the guidance to different mandates, risk appetites and client objectives.

Foundational concepts: Physical climate risks and investment opportunities

Physical climate risks are categorised as acute risks, such as floods and cyclones, and chronic risks, including rising temperatures and sea levels. These risks affect revenues, operating costs, asset values, insurance availability and capital expenditure. Adaptation and resilience investments are defined as those enabling preparation for, response to, and recovery from climate impacts, including climate analytics, cooling technologies and insurance solutions.

Role of private capital: Making investment portfolios resilient vs investing in resilience

The report highlights a dual role for private capital: strengthening portfolio resilience and financing adaptation in the real economy. Resilient portfolios are described as diversified, flexible and risk-aware across market cycles. Beyond risk mitigation, adaptation and resilience investments represent an estimated US$2 trillion market opportunity and can deliver avoided losses, economic benefits and wider social and environmental outcomes.

In focus: The investment process

Stage #1: Setting Investment Objectives stresses the importance of integrating physical climate risks into client discussions, either within existing financial objectives or through explicit climate-resilience goals. Short-term climate scenarios are highlighted as a tool to address time-horizon mismatches.
Stage #2: Asset Allocation focuses on incorporating physical risks into capital market assumptions and return forecasts. Evidence shows climate change could drive sovereign credit downgrades as early as 2030, while adaptation investment can offset these effects.
Stage #3: Due Diligence And Security Analysis calls for systematic sector- and company-level assessments, including supply-chain exposure. The use of taxonomies and open-source tools is encouraged to improve comparability and transparency.
Stage #4: Portfolio Construction And Monitoring promotes positive screening to identify adaptation- and resilience-aligned investments, alongside exclusions or phase-outs for high-risk exposures. Ongoing monitoring is required as risks evolve.
Stage #5: Post-Investment Engagement emphasises active ownership, engagement on resilience strategies, and emerging frameworks to measure adaptation and resilience impacts.

Changing the landscape: Engaging with the enabling environment

The report emphasises that managing physical climate risks requires engagement beyond portfolios. Investors are encouraged to engage with policy through Nationally Determined Contributions and National Adaptation Plans, support improved corporate disclosure, collaborate with insurers on data and risk transfer, and use blended finance structures to mobilise capital in climate-vulnerable regions.

Conclusion

The report concludes that physical climate risks require a systemic response. While tools are improving, meaningful progress depends on early risk integration, active engagement, supportive policy frameworks and capacity building within financial institutions.