analysis from First Street on the MSC World Res Index reveals that physical climate risk is no longer in ESG disclosure exercise with estimated annual index losses hitting $3.1 billion today and projected to compound by more than 15% by 2056.
Investors can no longer rely on sector averages, and so is the market mispricing the geographic commitment inherent in real estate.
Well joining us live here at the New York Stock Exchange to break down the data as well as performance dispersion of portfolios is Jeremy Porter, the Chief Economist and founding member of First Street.
Great to have you here.
Thank you so much for joining me.
We're here at the New York Stock Exchange and we know that publicly traded organizations as well as businesses across the country have to deal with climate risks.
So what. actually doing right now, so what we did is in our research we wanted to show that there is material impact from climate in the investment space and one of the things that we did was we went back and we actually looked at company disclosures.
And so by doing that we saw that companies since 2000 have doubled.
They've gone from 32% to 64% in terms of disclosing severe climate as a risk to their revenues and then ultimately.
We saw was an 80 analysis also of actual revenue reports show that companies are in fact reporting lower than expected revenues or negative revenues up to a year following the event.
So companies are taking it serious.
The awareness is increasing across the board, across all sectors, but it is becoming an emerging risk that people are starting to understand as a hidden risk that they weren't taking into account before.
Yes, and it goes without saying every day we continue to see headlines about unexpected climate risks and this does hit the bottom line as you mentioned.
So by sector, give us an overview of what's really happening below the surface.
The sectors that are impacted the most are real estate sectors, infrastructure sectors, sectors that have real assets.
Ground and real assets on the ground are susceptible to fiscal climate risk.
And so as you're building out an understanding of fiscal climate risk disasters from severe weather events, ultimately what we're seeing is that these sectors are starting to become proactive.
They're starting to think about what kind of data do I need to integrate into my risk analytics, into my investment committee decisions, and other.
Risk analytics framework so that we can understand the risk, but also how do I start setting aside reserves and capex so that I can adapt to the risks that exist in the area.
We don't want to pull out of markets.
Companies don't want to pull out of markets that have a tremendous amount of return.
So ultimately what they're saying is how do I stay in this market, but how do I adapt and mitigate the risk that.
And I do want to get your perspective because you do have conversations with many stakeholders.
So do you think investors are actually doing a good job of pricing in these climate disruptions into their evaluations?
It's retroactive right now.
What we're seeing is investors are seeing that companies are being impacted by severe climate risk and all of a sudden the evaluations are taking a dip.
Some places real estate, for instance, is really able to.
Rebound very quickly from that type of exposure, but investors are taking this information into account and starting to look forward in a proactive way.
I think in the next few years we'll see severe climate risk become a primary risk factor for investors.
So I think you mentioned a key word there, and that is retroactive.
So what does proactive actually mean?
Proactive is really get your hands on the right data, understand fiscal climate risk, understand how it impacts the business operations of specific.
Businesses within specific sectors right now what we're doing is we're waiting for an event to occur.
We're waiting for a revenue report to come out and then investors are responding to that.
Ultimately being able to respond to companies that are operationally not very vulnerable to severe climate risk and operationally have been able to adapt to the risks that exist there is where we should be moving into the future.
Yes, and finally, before I let you go, this report that was published is an extensive one, and there's a lot of data in there.
But what do you think needs to be done right now to integrate the risks into core investment decisions?
I think getting your hands on the right type of data.
I think people don't know where to get started.
Over the last 10 years we've seen a really rapid transition away from not really understanding severe climate risk, but mentioning it as a risk to actually starting to think about it as a real ESG impact.
And now moving to a place where we're trying to find alpha.
We're saying how can we take severe climate risk integrated into our system to give us business opportunities.
So I think we're on the right track.
It's a long, slow process, but getting the right data and integrating it into your system is the place to start.
And since you mentioned that word alpha, I do have to ask you, where are you actually seeing that right now?
There are some companies across all sectors, but we really are seeing real asset companies take this type of information, start to adapt to the information.
And investors that are investing in infrastructure and investing in commercial real estate assets are at the very front end.
There are some sort of early movers in that space that are already making decisions with the data, already starting to see positive responses from that in terms of their investments again, they're early movers, I think we'll start to see.
Some of the laggers and the slower movers in that space start to adopt those trends as they see other companies and investors making out off of that.
Jeremy, this is an ongoing conversation and something that we will continue to keep our eyes on not just on Wall Street but also Main Street.
So I appreciate your time.
Thank you so much for joining us today.
