Looming Floods and Heatwaves: The Imminent Climate Threat that Concerns Financial Decision-Makers
New Normal: A Warning, Not an Anomaly
Get ready to brace yourself, folks. The World Meteorological Organization (WMO) has issued a five-year climate forecast that should make every investor sit up and take notice. The forecast predicts that temperatures will stay at or near record highs, with an 86% chance that at least one year will exceed the 1.5°C global average threshold. That's not just a score—it's a red flag.
Gone are the days when extreme heat, storms, and droughts were considered outliers. They're the new normal, and it's time investors adjust their capital allocation strategies accordingly. There's no more room for complacency—you can expect one or more of these events in any given year.
Volatility Now, Stability Later
Let's get this straight: the WMO’s findings confirm what many investors have already observed. We're talking about a steady drumbeat of extremes, often unpredictable events that are growing in severity and frequency. In 2024, the globe saw the hottest year on record, with over 150 extreme weather events taking place worldwide. The ten costliest disasters alone caused over $229 billion in damages—that's roughly equal to the GDP of the state of Connecticut or the entire country of Portugal.
Given this gloomy outlook, it's no surprise that, earlier this year, the annual Global Risks Report from the World Economic Forum ranked extreme weather as the second-highest short-term risk and the top long-term threat.
Financial institutions are starting to acknowledge the scale of physical climate risk across their portfolios. Norway's $1.5 trillion sovereign wealth fund, managed by Norges Bank Investment Management (NBIM), has warned that the long-term impacts of climate change could lead to a 19% decline in the value of its U.S. equity holdings. In its 2024 Climate and Nature Disclosures, NBIM noted that physical climate risk may be materially higher than traditional models suggest, by a factor of five to ten.
Climate Risk: It's All About Perception
While many firms may keep quiet about their climate concerns when making investments or providing credit, the awareness isn't limited to financial experts or markets. According to a 2025 Pew Research Center survey, 74% of Americans have experienced at least one form of extreme weather in the past year. This broad-based public support signals a growing recognition that systemic climate risk requires systemic planning. Investors should take note—not just governments, but the private sector as well.
History is full of moments where systems failed to adapt until forced to. For the U.S. during World War II, it was Pearl Harbor, when isolationism finally collapsed under the weight of an existential threat. For global finance, it was the 2008 crash, when years of mispriced mortgage risk triggered a chain reaction that froze credit markets. More recently, it was COVID-19, which turned unthinkable lockdown policies into global consensus within weeks. These events proved that humanity could adapt and stave off even greater catastrophe.
We're now in a similar moment. This new era of climate volatility will inevitably force markets and policymakers to adapt. The question is whether this adjustment happens in a thoughtful, calculated way or through reactive chaos, triggered by cascading losses, infrastructure failures, and sudden insurance withdrawals.
A New Genre: Transition Finance
Robin Castelli, former head of climate risk model development for Citi, is betting on the former. He's the author of the forthcoming book "Principles of Transition Finance Investing," and for him, the tipping points are already here. "A liquidity squeeze," he explains, "is when there's a lack of available capital or cash in a market. If insurers exit, banks won't lend. And when lending freezes, asset values collapse. It's already unfolding as a result of these events."
Transition finance is about accounting for climate risk and resilience across entire portfolios—not a niche focused on a single metric like emissions reduction. To do this, investors must jettison their traditional models, which are too elegant, theoretical, and disconnected from real-world complexity. They might look good on paper, but in a world of climate volatility, they break down fast.
"You don't need 100% certainty to price risk," Castelli tells me. "You need a credible direction of travel and a set of assumptions you can back-test against physical reality. That's what we're still failing to do."
This new approach to investing is likely to result in winners and losers in capital markets over the next 20 years. Castelli predicts a $3-5 trillion transition-linked capital market by 2030. These opportunities exist across various sectors, including green energy deployment, energy efficiency retrofits, workforce retraining, and decentralized weather data companies like nubila. New financial instruments, such as carbon markets and climate-linked insurance, are also on the rise.
The time for action is now. As events like hurricanes, wildfires, and heatwaves continue to unfold, investors have an opportunity to not just manage risk but to profit from the transition ahead. The question is: will you be among those leading the charge, or will you be left behind?
- The WMO's forecast and the increasing frequency of extreme weather events emphasize the need for investors to consider climate risk in their capital allocation strategies, not just in financial markets, but also across various sectors such as green energy, energy efficiency, workforce retraining, and decentralized weather data companies.
- In the wake of the growing systemic climate risk, it's critical for financial institutions, including insurance companies, to recognize and address the physical climate risk in their portfolios, as the long-term impacts of climate change could lead to significant repricing of assets and potential withdrawal of capital.
- As policymakers and markets adjust to the new normal of climate volatility, science, technology, and environmental-science will play a crucial role in informing and shaping climate-change investment strategies, enabling investment firms to make informed decisions and navigate the transition to a low-carbon economy.
