It’s getting physical: Some investors in infrastructure could lose more than half of their portfolio to physical climate risks by 2050

This research note shows that the physical risks created by climate change are not limited to a distant future for investors in infrastructure, some of whom could well lose more than 50% of the value of their portfolio to physical climate risk before 2050 in the event of runaway climate change. Moreover, the average investor will also lose twice as much to extreme weather, mostly in OECD countries, compared to a low carbon scenario.

In this note, we describe our approach to measure baseline physical risks (today) and how physical risks would materialise from that baseline in different climate scenarios in terms of their impact on cash flows and discount rates at the asset level. We also look at how physical risks, despite being asset specific, are not easily diversified for most investors, some of whom could have a high concentration of such risks in their portfolios. To analyse the low diversification profile of portfolios and physical risk exposure, we built thousands of random portfolios and examine the degree of extreme risk in several climate scenarios. This focus on the materiality of the physical risks allows climate risk to be seen not solely as the result of a public policy decision but as a reality that, without action from all stakeholders, including governments, will have a very significant impact on the value of investments.This is a novel approach in the analysis of physical risk.