Over half (55 per cent) of global pension fund holdings are exposed to significant and active physical risks, research from MSCI and Swiss Re has found, with asset owners urged to take action now to shift from being exposed to being prepared.

The survey, which analysed the portfolios of 18 of the world’s largest asset owners, found that by value, this equals 25 per cent of total equity holdings of those surveyed, with small- and mid-cap companies particularly exposed.

The report also found that physical risks rarely "fly solo", revealing that 89 per cent of assets linked to 95 per cent of companies analysed face significant exposure to at least two hazards, and nearly two-thirds of companies are significantly exposed to three or more.

This means that almost every company in the assessed portfolios is navigating overlapping, high-intensity risk exposures, multiplying the potential for disruption and loss. 

In addition to this, the analysis showed that a quarter of equity value sits in high-hazard zones, which signals places where risks concentrate, although MSCI clarified that the same value for different hazards will not translate into the same financial outcome.

In particular, the report found that extreme heat and precipitation had the highest potential for impairment to revenue, resulting in average annual relative losses of at least 2.2 per cent and 1.1 per cent, respectively, for the 10 per cent most impacted companies.

The report suggested that labels can also prove misleading, warning that where a company is domiciled and the sector it’s classified into can mask exposures, as two utilities companies, for instance, may face very different risks, depending on where their facilities are located.

The report found that, on average, companies generate nearly half of their output outside their home country, and more than half the companies analysed operated across three or more countries, potentially hiding exposure in supply chains.

Exposure varied significantly between those surveyed, however, as the report revealed that whilst some portfolios carry as little as 14 per cent severely exposed portfolio value, others shoulder up to 61 per cent. 

There was also significant variation in how much companies disclosed, as the report found that only about 16 per cent of the highest-exposed firms (intensity value of 9 or higher for any hazard) disclose integrating physical risk into enterprise risk management. 

Given the findings, MSCI and Swiss Re warned that physical risks are no longer distant or hypothetical, but are already "eroding returns today".

Indeed, a recent MSCI research paper found that companies exposed to climate-related hazards such as hurricanes have already experienced statistically significant underperformance following extreme weather events.

Given this, the firm warned that asset owners who fail to integrate location-based risk intelligence may have to contend with mispriced assets, portfolio underperformance and missed opportunities in the growing adaptation economy.

However, it said that those who act can not only reduce losses but also position themselves at the forefront of resilience-driven investment.

"Where there are risks, there are also opportunities," the report stated. "Even within the same sector and region, companies can be impacted by physical risks in very different ways.

"As tools to assess and manage these risks continue to advance, investors are increasingly able to move from being merely exposed to being well-prepared, transforming hidden risks into opportunities for building stronger, more resilient portfolios.

"By integrating geospatial intelligence, engaging with companies on resilience and closing the adaptation gap, asset owners can shift from being exposed to being prepared, turning unseen risks into opportunities for stronger, more resilient portfolios."

This article was first published by our sister title, Pensions Age.

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