MSCI CEO: why markets must catch up with physical climate risk
The climate records keep falling all across the world, and now a big new emissions source is here: AI data centers.
Extreme weather events have been breaking records across the globe, with July setting the hottest temperature ever recorded in North America, Africa, and Asia, while June-July saw the hottest period in Western Europe. Rising sea surface temperatures, record-low river levels, and unprecedented rainfall in various countries have also been observed. These events are expected to continue, with a potentially "very strong" El Niño event forecasted.
Despite the mounting impacts of climate change, physical risk remains significantly undervalued in global financial markets. The economic costs of climate change could be far worse than previously anticipated. Between 2020 and 2024, the world experienced 99 extreme-heat events, compared with only 14 in the 1980s. Annual global costs of weather-related hazards increased from $23 billion to nearly $156 billion over the same period.
Meanwhile, the percentage of U.S. public companies making off-cycle revenue disclosures related to physical climate impacts has surged sixfold since 2000.
When examining the annual reports of over 25,000 firms, it was found that only 27% made substantial disclosures about how physical climate risks had affected or could affect their performance. Physical risk increasingly overlaps with and amplifies other emerging risks and opportunities, such as geopolitical tensions, tariffs, supply-chain disruptions, the global energy transition, and the AI revolution.
The AI boom has both exacerbated and potentially accelerated climate progress. On one hand, data centers consume massive amounts of electricity, contributing to global emissions and making them vulnerable to heatwaves, wildfires, and flooding. On the other hand, AI can help decarbonize hard-to-abate industries, improve emissions detection, modernize the electrical grid, enhance battery technology, and optimize agricultural methods.
By utilizing AI to compile location-based intelligence with asset-level precision, investors can better understand their exposure to extreme weather, geographic concentrations, tariff policies, and energy-transition mandates. This can enable financial markets to deliver more accurate pricing and recognize the opportunities associated with physical risk.
Accelerating the adoption of real climate solutions is crucial to addressing the urgency of the problem.
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