More than half (55%) of portfolio companies – representing a quarter of the equity holdings of major asset owners by value – face “severe physical hazards” resulting from climate change, according to a new study.
An analysis published by data provider MSCI and insurance group Swiss Re found that nearly two-thirds of holdings are exposed to three or more hazards, including heatwaves, water scarcity, and flooding.
The research used data from 11,215 companies covering around 500,000 physical assets, held in the portfolios of 18 asset owners representing US$4 trillion AUM in total and US$2 trillion in listed equity exposure. It found wide variations in the value at risk across portfolios with some portfolios carrying as little as 14% of severe exposure, while others shouldered up to 61%.
Asset owners providing the underlying data included the California State Teachers’ Retirement System, ABP, the Australian Retirement Trust and the Universities Superannuation Scheme.
Extreme heat and precipitation had the highest potential for impairment to revenue, the report found, resulting in average annual relative losses of at least 2.2% and 1.1%, respectively, for the 10% most impacted companies.
The study found that business interruptions were the biggest potential source of losses to investors followed by physical damage to assets. The cost of lost output, delayed shipments, premium logistics, and churn were estimated at around US$1.07 trillion, compared with US$76 billion in asset damage costs across all hazards and all companies.
Only about 16% of the highest-exposed firms disclosed integrating physical risk into enterprise risk management.
“This points to actionable engagements, such as revised mandates, due diligence and stewardship dialogue, for externally managed portfolios,” the report said.
“For internally managed portfolios, there are opportunities to reassess both public and private holdings and potentially engage with the management of investee companies for better information.”
