For years, investment decisions, real estate valuations, and credit analyses have relied heavily on historical data. However, climate change is increasingly invalidating the fundamental assumption behind this approach, because the climate no longer behaves according to past trends.
More intense rainfall, prolonged heatwaves, and increasing water stress have begun to directly impact companies’ operations, assets, and financial performance. Despite this, many valuation models still rely on historical climate data. The result is a systematic underestimation and mispricing of physical climate risks.
Recent research published by the US-based climate risk analytics firm First Street reveals that physical climate risks are no longer a future scenario but a present-day financial reality. According to the study, the likelihood of companies issuing profit warnings following extreme weather events has increased 6.5-fold over the past 20 years. This finding demonstrates that physical climate events directly impact not only operations but also revenues, profitability, and corporate value.
In other words, physical climate risk is no longer merely an environmental issue; it is becoming a key determinant of financial performance and corporate valuation.
This trend is clearly evident in the real estate sector as well. An analysis by First Street—covering more than 45,000 assets held by 65 Real Estate Investment Trusts (REITs) operating across 61 countries—reveals that physical climate risks reduce the average REIT’s annual revenue by approximately 1.1%. Across the MSCI World REIT Index, this loss amounts to roughly US$3.1 billion. More importantly, in major disaster scenarios expected to occur “once in a century,” the average revenue loss can rise to 15%. These findings demonstrate that physical climate risks are no longer merely low-probability disaster scenarios; they have become tangible costs impacting current financial performance.
A similar picture emerges regarding data centers, which form the foundation of artificial intelligence investments. According to an analysis by First Street covering 97 global data center markets, approximately 80% of data center capacity is located in areas at risk of flooding, severe winds, or wildfires. Moreover, more than half of these facilities are exposed to chronic climate risks such as extreme temperatures, drought, and water scarcity. Rapidly growing data center hubs—particularly Northern Virginia, Johor, and Marseille—rank among the locations facing the highest levels of physical risk. This situation indicates that the digital economy’s most capital-intensive infrastructure is increasingly being built in regions that are vulnerable to climate-related threats.
However, the mere fact that a facility is located in a flood zone or an area prone to extreme heat does not provide sufficient information to make an investment decision. Financial institutions and investors now want to understand the financial implications of these risks. Questions regarding the potential reduction in an asset’s annual revenue, the duration of possible operational disruptions, the impact on asset value, and changes in loan repayment capacity are becoming increasingly important. Consequently, it is becoming critical not only to map physical climate risks but also to model them financially in terms of expected damage, operational disruption, and economic loss.
Another notable shift for companies concerns their perspective on adaptation investments. While climate adaptation measures were previously viewed primarily through the lens of environmental responsibility or regulatory compliance, the economic benefits of these investments are now also being calculated. For instance, analyses are conducted to determine the financial losses a flood protection system might prevent, the extent to which investment in cooling infrastructure could reduce production disruptions, or how water efficiency projects might mitigate future operational risks. Consequently, adaptation is evolving from a mere compliance obligation into a strategic capital decision with a calculable return on investment.
Ultimately, climate change is no longer merely an environmental agenda item; it is a financial risk factor that directly impacts corporate revenues, asset values, and investment performance. At a time when analyses based on historical climate data fall short of predicting the future, integrating physical climate risks into financial decision-making processes is becoming increasingly critical. Particularly for capital-intensive assets—such as long-term investments, real estate portfolios, infrastructure projects, and data centers—institutions that treat physical climate risks as an integral component of economic performance will gain a significant advantage in adapting to changing climate conditions and managing their capital more effectively.
