When it comes to sustainability, the immediate risk to investors may be far less theoretical than debates on regulation, net-zero targets, and political shifts suggest.
Physical climate risk – from floods and droughts to wildfires and extreme heat – is reshaping insurance markets, asset valuations and business costs, and will continue to do so.
In a recent discussion with Dr Penny Byrne, ESG and climate change investment analyst at SBG Securities, she made it clear that while transition risk may feel flat, physical climate risk is “massively up” and significantly harder to quantify.
Unlike regulatory changes that unfold gradually, physical climate events have an immediate impact, affecting homes, infrastructure, agricultural output and corporate balance sheets. As their frequency and severity increase, investors are being forced to reconsider how resilient their portfolios really are.
Insurance is changing
South Africa has, in recent years, experienced flooding and wildfires that have affected homes and businesses, while droughts have devastated crops, undermining the viability of farms.
In the Atlantic, three Category 5 hurricanes developed during the 2025 hurricane season, for the first time in 20 years, while the US recorded above-average tornado activity from March to June of the same year, with March seeing a record 300 tornadoes.
Insurers have seen an increase in weather-related claims due to these events, with some insurers noting that reinsurance costs have also climbed as reinsurers absorbed losses, prompting them to raise rates and retention levels materially.
As a result, premiums are rising.
“We have seen home insurance go up in the US, and in many other regions as well,” says Byrne.
According to Harvard Business School’s Institute for Business in Global Society, the US Senate Budget Committee described the climate-related home insurance crisis as a “looming economic threat” with the potential to trigger a financial crisis like that of 2008.
“One thing is certain: unless the United States and the world rapidly transition to clean energy, climate-related extreme weather events will become both more frequent and more violent, resulting in ever-scarcer insurance and ever-higher premiums,” wrote the committee in a December report.
This view is supported by research from Howden and Boston Consulting Group. It projects that insurance premiums for physical risks and natural catastrophe protection are set to increase by 50% by 2030, reaching $200 billion to $250 billion globally, due to increased losses from climate events, accelerated growth in exposures, implementation of climate risk disclosures, and governments transferring public liabilities to private markets.
Byrne says that, as climate risk increases, some regions are becoming uninsurable, with California as a prominent example.
Insurers are, however, adapting.
Where catastrophe cover was once bundled, policies are increasingly being split into separate components, such as fire, flood, hail, and drought. Customers must now select coverage tailored to their perceived risks.
A new type of risk assessment is also emerging. “An assessor will go out to properties to inspect for damage from previous weather events and flag any issues that need to be addressed. They also conduct weather modelling in an area to get an idea of what would happen in, for example, an extreme rainfall event, and examine what the biggest risk to a certain area might be,” says Byrne.
Frequency and severity
Looking ahead, Byrne expects to see more extreme weather events.
“Multiple factors are compounding, making extreme events more likely. They have been increasing in frequency and severity for quite some time. We will see flooding, drought, extreme heat, rainfall, hail, damaging winds, storm surges, and sea level rise continuing. The oceans are getting warmer,” she explains.
The investment dilemma
The difficult question, Byrne says, is this:
“As an investor, which companies do you invest in or not invest in based on physical climate risk?”
Byrne unpacks the answer to this question in this blog in our sustainability series.
The views and opinions shared are for informational purposes only. They are not intended to serve as investment advice and do not represent the views or opinions of Standard Bank. This information should be used as a starting point for generating investment ideas and should not be relied on as the basis for investment decisions. The Standard Bank of South Africa Limited will not be responsible for the results of any investment decisions made based on the views provided.
