The Answer in Brief
The climate-related investment risks most likely to impact portfolios in 2026 fall into four main categories: physical risks, transition risks, liability risks, and systemic risks. Each affects portfolios differently, from direct asset damage to regulatory costs and macroeconomic shocks. For investors, understanding these risks is essential to effective climate risk management.
The conversation around climate risk is shifting fast. After another year marked by billion-dollar disasters, tightening regulations, and growing scrutiny of net-zero pledges, investors are asking a sharper question: Which risks matter most for portfolios in the year ahead?
2026 is shaping up to be a decisive test. Physical hazards are escalating, the low-carbon transition is speeding up, liability cases are mounting, and systemic shocks are spreading through entire economies. Each of these forces hits portfolios differently, but together they are reshaping how capital is priced and where value is most at risk.
This article breaks down the four climate-related risks every investor should prepare for in 2026 and why ignoring them could mean missing both the threats and the opportunities they present.
What Are Physical Climate Risks for Investors?
Physical climate risks arise from both acute events—such as hurricanes, wildfires, and floods—and chronic shifts like sea-level rise, water scarcity, and sustained heat stress. Both categories can directly damage assets, disrupt operations, and erode long-term valuations.
The evidence is mounting. Hurricane Ian in 2022 generated nearly USD 65 billion in insured losses,1 while chronic flooding linked to sea-level rise has already wiped USD 15.8 billion in U.S. coastal property value.2 Forward-looking estimates are even more sobering: climate hazards could drive USD 560 billion in fixed asset losses by 2035 (see Figure 1).3
Figure 1. Total estimated annual fixed asset losses (USD, all companies)
The implications for investors are multifaceted:
- Asset repricing: Insurance premiums are expected to rise 41 percent by 2040, making some properties uninsurable.4
- Revenue disruption: Heatwaves, droughts, or floods can halt operations and ripple through supply chains.
- Portfolio concentration risks: Investors exposed to climate-sensitive geographies or sectors face correlated downside shocks.
- Credit quality erosion: Issuers may experience higher CapEx burdens or defaults as risks accumulate
What Are Climate Transition Risks for Investors?
While physical risks dominate headlines, transition risks are accelerating just as quickly. These arise from policy shifts, technological disruption, and market preference changes linked to the low-carbon transition.
Transition risks come from policy shifts, technology disruption, and market preference changes tied to the low-carbon transition.
Consider the policy dimension: the EU carbon price is forecast to reach EUR 108 per tonne by 2027, a major cost increase for energy-intensive industries.5 At the same time, new regulations—from combustion engine bans to mandatory clean energy procurement—are redefining what competitiveness looks like.
For investors, the focus is shifting from mitigation to adaptation. Few now expect the drastic cuts once envisioned under a 1.5°C pathway to materialize. The pressing question is how climate disruptions — from flooding and droughts to extreme weather — will affect portfolios, and how policymakers will react in turn.
Although many firms have pledged net-zero targets, credibility is a growing concern. A 2023 UN assessment found that only 4 percent of corporate pledges meet minimum standards for detail, scope, and transparency.6
Technology adds another disruptive layer. Renewables are outpacing fossil fuels on cost in many regions, while green hydrogen, grid-scale storage, and electric transport are scaling rapidly. Market preferences are also shifting, with consumers and supply chain partners rewarding companies that can demonstrate credible transition plans.
What are Climate-Related Liability Risks for Investors?
Liability risks are those where companies are held legally or financially responsible for climate-related damage. These risks are becoming more material as physical hazards amplify the consequences of operational failures.
A defining case came in 2019, when PG&E, California’s largest utility, filed for bankruptcy after wildfires linked to its equipment destroyed billions in value. The firm’s share price collapsed by more than 80 percent, wiping out over USD 30 billion in market capitalization.7
More recently, in early 2024, Xcel Energy lost 8 percent of its market value in a single day after disclosing potential liability for a wildfire in Texas.8 These examples highlight how liability risks can translate climate events into portfolio-shaking financial losses.
For investors, the challenge is twofold: identifying which issuers are most vulnerable and engaging early to push for robust risk mitigation.
What Are Systemic Climate Risks for Investors?
Unlike other categories, systemic risks transcend sectors and geographies. They emerge when climate shocks ripple through macroeconomic systems, financial markets, and political structures.
Systemic risks are broad, economy-wide threats that cascade through macroeconomic and financial systems.
Food inflation provides a stark example. Extreme weather events, including droughts and floods, have already driven sharp price increases for global staples. In 2022, U.S. vegetable costs spiked by 80 percent year over year in some regions.9 Commodity-driven inflation creates headaches for central banks, complicating monetary policy and destabilizing consumer expectations.
Emerging markets are disproportionately vulnerable. Many rely heavily on food imports, lack fiscal buffers, and face heightened currency risks. Research suggests that over USD 1 trillion in corporate value is concentrated in countries most exposed to climate upheaval.10
Systemic risks also extend to health and labor productivity. Rising temperatures are enabling diseases such as dengue and malaria to spread into new regions, straining public health systems and reducing workforce capacity.
How Is the Mis-pricing of Climate Risk a Strategic Opportunity?
Despite mounting evidence, climate risk remains systematically undervalued in financial markets. This is backed by an analysis conducted by the International Monetary Fund, which concluded that climate risk is not accurately reflected in equity valuations.
There are three primary reasons for this mispricing:
- Fragmented data: Disclosures are inconsistent across companies, sectors, and jurisdictions.
- Short-termism: Average equity holding periods have collapsed to just 5.5 months, undermining long-term risk integration.11
- Aggregate risk: Climate hazards interact systemically, meaning diversification alone cannot fully insulate portfolios.
For institutional investors, this gap represents more than a blind spot—it’s a strategic opportunity. By integrating forward-looking climate risk management for investors—through scenario analysis, credible transition plan assessments, and AI-driven data integration—investment leaders can mitigate downside exposure while positioning portfolios to capture the upside of the low-carbon transition.
Want a deeper dive into tools and frameworks for managing these risks? Download The Investor’s Guide to Climate Risk Management to learn how AI can transform risk into actionable investment insight.
RELATED FAQs
Why are climate risks often mispriced in markets?
Climate risks remain systematically underpriced because disclosures are inconsistent across sectors and geographies, making it difficult to compare companies. Markets also tend to reward short-term performance, while climate risks unfold over decades. On top of that, risks often interact in ways models don’t fully capture. Physical damage, regulatory shifts, and supply chain shocks can compound each other, amplifying the impact beyond what diversification or traditional valuation methods suggest.
Which sectors are most exposed to climate risk?
Sectors with high physical exposure or heavy reliance on carbon-intensive assets are most vulnerable. Real estate faces rising insurance costs and property devaluation from floods, fires, and storms. Utilities and energy companies are exposed to liability risks and stranded asset risks. Agriculture is highly sensitive to droughts and extreme weather, while fossil fuel companies face existential transition pressures as carbon pricing, renewable adoption, and policy bans accelerate.
How can investors assess climate transition plans?
Credible transition plans go beyond distant “net zero” promises. Investors should look at whether companies have set science-based interim targets, disclosed capital expenditure commitments aligned with those targets, and provided transparent reporting on progress. Plans that clearly link CapEx, R&D, and operational decisions to emissions reduction milestones are more likely to withstand regulatory and market scrutiny than those relying on vague pledges or offsets.
Are climate risks diversifiable?
Only to a degree. While some physical risks can be managed by spreading exposure across regions and industries, systemic risks such as food price shocks, macroeconomic instability, or regulatory changes cut across sectors. This means that traditional diversification strategies cannot fully insulate portfolios. Instead, forward-looking scenario analysis and stress testing are needed to capture how risks could cascade through entire financial systems.
What role does AI play in climate risk management?
AI enhances climate risk management by filling the gaps that manual analysis and inconsistent reporting leave behind. It can process unstructured disclosures at scale, quantify physical and transition risks down to the asset level, and continuously monitor exposures in real time. For investors, this means moving from static, backward-looking reports to dynamic insights that can guide allocation decisions, engagement strategies, and regulatory compliance.
References
- Swiss Re. “Hurricane Ian Drives Natural Catastrophe Year-to-Date Insured Losses to USD 115 Billion, Swiss Re Institute Estimates.” Press release, December 1, 2022. Link
- First Street Foundation. “Rising Seas Erode $15.8 Billion in Home Value from Maine to Mississippi.” 2019. Link.
- World Economic Forum. “Business on the Edge: Building Industry Resilience to Climate Hazards.” World Economic Forum, December 11, 2024. Link.
- Swiss Re. “Growing Risk: The Insurance Industry’s Crucial Role.” Swiss Re, 2023. Link.
- Groom, Nichola. “Analysts’ EU Carbon Price Forecasts Steady as US Tariff Concerns Linger.” Reuters, July 16, 2025. Link.
- Twidale, Susanna. “Just 4% of Top Companies Meet UN Climate Target Guidelines – Study.” Reuters, November 6, 2023. Link.
- Fuller, Thomas. “California Power Provider PG&E Files for Bankruptcy in Wake of Fire Lawsuits.” NPR, January 29, 2019. Link.
- Reuters. “Xcel Energy Shares Fall From Potential Texas Wildfire Liability.” Reuters, February 29, 2024. Link
- Hoppe, Joseph. “Extreme Weather Is Driving Global Food Price Spikes, Report Says.” Wall Street Journal, July 21, 2025. Link.
- Middleton, James, and John Babalola. “$1.14 Trillion in Corporate Value Located in Countries Most at Risk from Climate Upheaval.” Maplecroft, April 30, 2025. Link.
- Chatterjee, Saikat, and Thyagaraju Adinarayan. “Buy, Sell, Repeat! No Room for ‘Hold’ in Whipsawing Markets.” Reuters, August 3, 2020. Link.
Author Information
