HSBC Asset Management - Thematic Investment Insights

Beyond Transition: Navigating physical climate risks.

Key Highlights

• Physical climate risks are increasingly recognised as financially material, with global economic losses from natural disasters exceeding USD 4tn over the past 50 years. [1] However, only 40 per cent of the USD 280bn in losses from natural catastrophes in 2023 were insured. [2] The financial burden of these risks is unevenly distributed, with lower-income countries experiencing disproportionately higher GDP losses. Despite the evident materiality, there is no consensus on the magnitude of future impacts, with projections ranging from catastrophic GDP losses to minimal effects. This uncertainty underscores the need for enhanced research and data capabilities to integrate physical risks into investment strategies effectively.
• Asset managers have traditionally focused on transition risks, but the growing frequency and severity of physical risks demand enhanced research and integration into investment strategies. However, the increasing frequency and severity of physical climate risks are shifting the focus of concern. Unlike transition risks, physical risks require specialised datasets and expertise, including granular data on chronic and acute perils by location.  Both top-down and bottom-up approaches offer valuable insights for strategic asset allocation and security selection.
• A “build or buy” dilemma exists in climate-risk modelling. While in-house models provide transparency and control, third-party solutions offer immediate insights. A hybrid approach, leveraging a continuum of modelling options, can tailor solutions to specific investors’ needs, ensuring that physical risks are considered in a practical and impactful manner.

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1 - World Meteorological Organization, “Economic costs of weather-related disasters soars but early warnings save lives”, May 22, 2023.
2 - Swiss Re Institute, “Sigma, Natural catastrophes in 2023: gearing up for today’s and tomorrow’s weather risks”, No 1/2024.

Important information 

For Professional Clients and intermediaries within countries and territories set out below, and for Institutional Investors and Financial Advisors in the US. This document should not be distributed to or relied upon by Retail clients/investors.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. The performance figures contained in this document relate to past performance, which should not be seen as an indication of future returns. Future returns will depend, inter alia, on market conditions, investment manager’s skill, risk level and fees. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries and territories with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries and territories in which they trade.