MSCI CEO: why markets must catch up with physical climate risk
· Fortune
All across the world, all across different kinds of extreme weather, the records keep falling.
This summer alone, we saw the hottest July ever recorded in North America, Africa and Asia; the hottest June–July ever recorded in Western Europe; the hottest global average sea surface temperature ever recorded; the lowest water levels ever recorded in some of Europe’s biggest rivers; and record-breaking rainfall everywhere from China, Japan, South Korea, Pakistan and Canada to Hawaii, Missouri, Indiana, West Virginia, New York and beyond.
In the months ahead, a “very strong” El Niño event may lead to even more records falling, based on forecasts from the World Meteorological Organization.
And yet, even as the deadly and destructive impacts of extreme weather accumulate, and even as researchers warn that the economic costs of climate change could be far worse than previously thought, physical risk remains significantly undervalued in global financial markets. Fixing this problem would go a long way toward accelerating the world’s adoption of real climate solutions.
The economic and financial impacts of climate change
To understand the urgency of the problem, consider just a few numbers. Between 2020 and 2024, the world witnessed 99 extreme-heat events, compared with only 14 in all of the 1980s, according to a recent Allianz report. Over roughly that same period (1980 through 2023), the annual global costs of weather-related hazards spiked from about $23 billion to nearly $156 billion, according to a study by First Street, which is now part of MSCI.
Meanwhile, a separate analysis from MSCI and First Street shows a sixfold increase since 2000 in the percentage of U.S. public companies making off-cycle revenue disclosures related to physical climate impacts. This means that physical risk is already visible in investment portfolios. And researchers in Europe have shown that neglecting physical risk can lead investors to underestimate potential asset losses by 70% or more.
The costs of extreme weather have gone up, but most public companies still do not provide the level of transparency that investors need. When MSCI and First Street examined the annual reports issued by more than 25,000 firms between 2023 and 2025, they found that only 27% made a substantial disclosure explaining how physical climate risks either had affected or could affect their performance.
The intersection of physical risk and AI
For that matter, physical risk does not exist in a vacuum. It increasingly overlaps with and amplifies other emerging risks and opportunities, such as geopolitical tensions, tariffs, supply-chain rewiring, the global energy transition and the AI revolution. This makes it all the more important for financial markets to capture location-based risks in asset prices.
To take a basic example: When extreme weather or geopolitical turmoil disrupts shipping routes or manufacturing production, it affects global supply chains. We have seen this everywhere from the Panama Canal and the Strait of Hormuz to Germany and Taiwan.
The AI boom offers an even broader example.
In the short run, AI has arguably exacerbated physical risk, for two big reasons. First, data centers are consuming a massive amount of electricity in general, and fossil-fuel electricity in particular, thereby placing upward pressure on global emissions. (BloombergNEF has projected that by 2035, data centers in the U.S. alone will burn more natural gas than all but four countries.) Second, the location of many data centers makes them especially vulnerable to heatwaves, wildfires, flooding and other climate hazards. This has complicated the data-center opportunity for insurance companies, who view these facilities as some of the world’s most valuable insured assets.
On the other hand, AI has tremendous potential to accelerate climate progress over the long term. It could help the world decarbonize hard-to-abate industries, improve emissions detection and mitigation, modernize the electrical grid while integrating renewables, enhance battery technology, optimize agricultural methods, and more. AI supply chains have already started expanding from chips into electrical grids, which has turned energy utilities and equipment makers into critical parts of a new technology ecosystem.
If we look at physical risk specifically, AI has made it easier to compile location-based intelligence with asset-level precision. This can help investors measure their exposure not only to extreme weather, but also to geographic concentrations across supply chains, tariff policies and energy-transition mandates. All of which can help them better understand their overall risk exposure, and thus help financial markets deliver more accurate pricing.
The physical-risk opportunity
It can also help investors recognize the opportunities associated with physical risk.
The push to build greater climate resilience in a warming world will require enormous investments across industrial ecosystems, including electrical grids, battery-storage facilities, power plants, and transportation and logistics networks. Countries and companies must scale up infrastructure to manage the impact of rising global temperatures, while also future-proofing key value chains. This will not be possible without strong support from the capital markets.
The best way to encourage that support is to give investors the data and tools they can use to evaluate and price physical risk in their portfolios. With the help of AI and other advanced technologies, the world is moving in that direction. It just needs to move faster.
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