Physical risk guide: For asset owners and asset managers
Guide outlines frameworks for assessing, managing and reporting physical climate risks in investment portfolios. It covers exposure mapping, hazard identification, financial impact metrics (e.g. AAL, Climate VaR), scenario analysis, adaptation strategies and regulatory alignment, emphasising integration into governance, risk management and disclosure processes.
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OVERVIEW
Introduction
Physical climate risks are increasingly financially material, affecting asset prices and loss expectations. MSCI estimates USD 1.3 trillion in average annual losses across ~9,350 companies, largely from business interruption. Geographic concentration heightens exposure, while only ~30% of highly exposed firms disclose risk management practices, creating investor and regulatory risk.
Chapter 1: Investor objectives and use cases
Investors focus on three objectives: understanding, managing and reporting physical risks. Key use cases include mapping exposure, assessing hazards, stress testing, integrating risks into portfolios and aligning with regulation. Metrics such as AAL, Climate VaR and hazard intensity support decision-making across these activities.
Chapter 2: MSCI physical risk solutions
MSCI’s framework links asset location data to financial impacts using geospatial intelligence. It distinguishes exposure metrics from financial metrics, enabling translation of hazard data into issuer- and portfolio-level losses. Accurate mapping of asset locations is critical, though data gaps remain a limitation.
Chapter 3: Disclosure standards and regulatory frameworks
Regulatory expectations (e.g. ISSB IFRS S2, ESRS) require integration of physical risk into governance, strategy, risk management and metrics. Disclosures must include scenario analysis, geographic concentration and quantified risk metrics. Transparent documentation of assumptions, methodologies and data limitations is essential for auditability.
Chapter 4: Assessing exposure and materiality
Materiality assessment involves identifying hazard exposure, vulnerability and financial impact. Metrics such as AAL and return-period losses quantify expected and tail risks. Geographic concentration and hazard overlap can amplify portfolio risk, even in diversified portfolios.
Chapter 5: Adaptation and resilience
Adaptation reduces vulnerability and enhances resilience. Measures include infrastructure upgrades and operational changes, lowering AAL, insurance costs and business interruption. Investors can identify engagement targets and investment opportunities in resilience solutions, such as climate-resilient infrastructure and risk transfer mechanisms.
Chapter 6: Scenario analysis and stress testing
Scenario analysis uses NGFS and IPCC pathways to assess future risk under varying temperature outcomes. It supports stress testing and sensitivity analysis across time horizons (e.g. 2030–2100). Combining model-driven and narrative scenarios improves robustness, though results depend on assumptions and data quality.
Chapter 7: Practical applications
Applications include mapping exposures, quantifying impacts, evaluating adaptation and monitoring portfolio risk. Investors should prioritise high-exposure, low-preparedness (HELP) companies, set measurable engagement milestones and track progress. Portfolio-level metrics (e.g. Climate VaR, AAL) enable benchmarking and risk management across scenarios.
Appendix
Frameworks such as EU Taxonomy and IIGCC integrate resilience into investment decisions. Limitations include incomplete asset data and partial coverage of indirect impacts (e.g. supply chains). Climate models provide scenario-based projections rather than forecasts, requiring careful interpretation.
