Resilience is no longer optional for investors in the face of extreme weather

15 January 2025 - Investors should integrate physical climate risks at the start of the investment process, writes Elizabeth Clark of the Cambridge Institute for Sustainability Leadership. First published in Responsible Investor.

Last year, Spain saw one of the deadliest natural disasters in its history, as rains in Valencia killed over 200 people, inundated homes, and damaged businesses. Hurricane Milton followed soon after, leaving a trail of devastation across the Atlantic. Now, barely two weeks into 2025, wildfires have ripped through Los Angeles at overwhelming speeds, with the insurance industry fearing this could prove one of the costliest wildfire outbreaks in US history.

These events are brutal reminders of the physical impacts of a changing climate. With global average temperature exceeding 1.5°C above pre-industrial levels for the first time in 2024, officially making it the hottest year on record, extreme weather is now inevitable. The implications for investors are clear: resilience is no longer optional – it’s imperative.

The financial toll of these disasters is staggering. In Europe alone, economic loss from extreme weather reached €13.4 billion in 2023. This is only expected to rise and disasters are expected to hit the Global South much harder.

Yet, adaptation efforts remain sidelined compared to decarbonisation efforts to meet net-zero targets. Developing countries require $187-359 billion annually for adaptation, but current financial flows amount to a fraction of this, according to the 2024 UN Adaptation Gap Report. National Adaptation Plans are also essential signals for investment opportunities but most are yet to be submitted.

Without action, the gap between need and funding will grow, creating systemic risks that threaten both global markets and individual portfolios.

For investors, these risks are no longer hypothetical. According to S&P Global, two-thirds of major companies now face high-risk exposure to the physical impacts of climate change. A recent report by the World Economic Forum and Boston Consulting Group warns that CEOs and businesses unprepared for these impacts could see a hit to EBITDA of up to 25% by 2050. 

Resilience isn’t just a moral responsibility or reputational safeguard – it’s a commercial imperative. The message to investors is clear: prepare for a world where extreme weather is inevitable and resilient investment strategies are an essential source of competitive advantage.

How? By building climate resilience within portfolios and bridging the adaptation gap by investing in systemic resilience to reduce long-term costs, damages, and risks.

However, while many investors acknowledge the importance of integrating physical climate risks into financial decision-making, this has not yet translated into action at the scale needed. Most investors are deterred by the fragmented and unfamiliar approaches to assessing and addressing new forms of risk.

With extreme weather projected to intensify, laser-focused and ‘good enough’ risk assessments are required from investors on critical areas where they can make smarter decisions. Progress, not perfection, is key.

Investor action

A recent report released by the Investment Leaders Group, alongside the Cambridge Institute for Sustainability Leadership, takes a unique view of this, breaking down what is needed at each stage of the investment process for listed equity and debt portfolios by deploying tools and strategies already available in the market.

Integrating physical climate risks at the start of the investment process can better prepare investors to assess and address their exposures at later stages. This includes a focus on asset allocation, where it is vital to understand how physical climate risk can affect short- and long-term economic and return forecasts.

While investors can reduce losses in the near term by minimising risk at a portfolio level, systemic risk requires a systemic response. Without action to address the international adaptation gap, parts of the world will become uninsurable, and a growing range of assets will rapidly become impossible to invest in, as was highlighted by Prime Minister of Barbados, Mia Mottley.

To safeguard future markets, global policy action is required to incentivise investors to fund climate adaptation and resilience. The Investment Leaders Group report outlines ways to accelerate this, showing how investors can proactively engage internally and with critical external stakeholders, and identifying opportunities for collaboration and advocacy across policy, businesses, and the broader financial sector.

There are already examples of investor engagement with a systems lens. For example, Investment Leaders Group member Manulife Investment Management worked with an Asian company exposed to flooding risks from rainfall and storm surges to improve the company’s seawall and drainage systems. In parallel, they worked with government departments to accelerate the country’s National Adaptation Plan, highlighting vulnerabilities in public infrastructure that created risks for the company.

2025 opened with headlines about extreme weather and, inversely, backlash against action to stop it. However, the financial devastation of extreme weather will increasingly rise above the noise as the costs of physical climate impacts hit – and hit hard. 

As extreme weather reshapes the economic landscape, those who integrate resilience into their investment strategies – and succeed in building momentum for national adaptation strategies – will strengthen their competitive positioning in increasingly turbulent markets.

First published in Responsible Investor.

The Investment Leaders Group (ILG) is a global network of pension funds, insurers and asset managers with over US$9 trillion under management and advice. The ILG’s vision is an investment chain in which economic, social and environmental sustainability are delivered as an outcome of the investment process. The ILG is a voluntary initiative, driven by its members, convened by CISL and supported by academics in the University of Cambridge. For more information, reach out to InvestmentLeadersGroup@cisl.cam.ac.uk