If we don’t invest in reducing physical climate risk now, we’ll pay for it later

Extreme weather causes damage to finances, yet climate risk remains absent from financial frameworks

Solar panels sit on the roof of a residential property in view of the Sydney Harbour Bridge in Sydney, Australia, Mar 30, 2026. REUTERS/Hollie Adams

In 2025, the economic reality of physical climate risk hit hard. Hurricanes drove sharp home insurance premium hikes and cancellations along Florida’s coast. UK floods pushed up claims in high-risk areas. In the Philippines, scientists attributed 30 percent of the damage from Typhoon Fung-wong directly to climate change. These were not isolated weather events. They were financial events, and markets are still ‌not pricing them as such.

The numbers are stark. Extreme weather caused $2.3 trillion in losses between 2000 and 2023, disrupting operations, supply chains and broader economic and natural systems. Physical climate risk now threatens credit ratings, insurability and public finances – as well as the long-term returns that pension funds and insurers can deliver. Yet it remains largely absent from asset pricing, portfolio construction and credit analysis.

COP30 in Belem was supposed to change this. Billed as the “Amazon COP”, it was meant to put adaptation and resilience on a par with cutting emissions, ⁠not least for the most vulnerable countries. The summit delivered some building blocks, from headline commitments to scale adaptation finance and operationalise the Loss and Damage Fund, to stronger language on resilience in key agreements.

Yet it fell short of a credible pathway to close the adaptation finance gap and offered little clarity on how to mobilise private capital at scale. Investors left Belem without the policy certainty they need to systematically factor physical climate risk into pricing and capital allocation.

Some investors aren’t waiting. Take Octopus Energy Generation, which applied the Institutional Investors Group on Climate Change’s physical climate risk appraisal methodology (PCRAM) to a 100 MW solar portfolio across Europe. The methodology identified hail damage and heat stress as material risks and showed how targeted resilience measures, in this case, polymer coating to enhance resistance to hail, and an automated misting system to cool panels, ‌could protect ⁠revenues and enhance long-term value.

It also explored how reducing residual risk through those measures could improve the asset's insurability.

Another is Private Infrastructure Development Group, which stress-tested a freight ferry on Lake Victoria against changing water levels across 49 climate scenarios using the methodology. It was able to map direct and indirect benefits from investment in resilience-building measures that protected returns.

These are not edge cases. They show what becomes possible when physical risk is treated as a financial variable rather than ⁠an environmental footnote.

The tools to do this exist. What’s missing is scale. Fragmented methodologies, poor disclosure and thin investment pipelines are holding back capital, while policy and regulation still tend to prioritise cutting emissions over building resilience. Without clearer signals and better data, capital will struggle to flow at the scale needed.

The question ⁠isn’t whether physical climate risk is financially material. Last year’s events removed any lingering doubt about that. The question now is whether we can close the gap between knowing that and acting on it.

Investors who treat resilience as a core part of their portfolio strategy will be ⁠better-placed than those who don’t. Policymakers who put the right standards and incentives in place will spend less on emergency disaster relief later. And companies that build resilience into their operations now, rather than retrofitting it after the damage is done, will protect more than just their assets.

The choice is as simple as it is urgent: invest in resilience by design or pay for it by default.