Highlights for investors from São Paulo’s ‘Finance Week’

Author: Laura Nishikawa and Linda-Eling Lee

Key findings: 

• Physical risk intensifying: Nearly two-thirds of asset owners’ equity holdings face three or more physical hazards, with one-quarter in high-risk areas, emphasizing the financial relevance of localized climate risk. 

• Investing in resilience: Companies in industries most exposed to physical risk are making resilience part of risk management but clearer market signals are needed to price and incentivize resilience as a competitive advantage. 

• Carbon trading could play a pivotal role in mobilizing private-sector investment for global climate and nature goals, provided investors can identify and back high-integrity projects that deliver measurable value.  

As the United Nations COP30 summit opens in Belém, Brazil, companies and investors are confronting a rise in extreme weather events and other physical risks. Countries and investors alike are exploring ways to mobilize private-sector finance for advancing climate action. 

Those are among the perspectives shared at a series of conversations that we and our colleagues took part in with capital-markets leaders in São Paulo last week. The conversations, including at the “PRI in Person” responsible-investment conference, also focused on the essential role of investors in financing the energy transition, resilient infrastructure, nature-based solutions and clean-technology innovation.  

Here are some of the insights offered throughout the week. Together they serve as a prelude to the climate talks getting underway in Belém and the opportunities and challenges beyond. 

Physical risk is rising 

“In a world that is increasingly fragmented and polarized, it’s important for companies and investors to understand localized risks, Richard Mattison , MSCI’s head of sustainability and climate, stressed on Thursday at the Sustainable Innovation Forum. “Physical risks are localized and they’re on the rise.” 

• Research published last week by MSCI and Swiss Re Risk Data Solutions analyzing the portfolios of 18 global asset owners representing USD 4 trillion in total assets under management finds that nearly two-thirds of portfolio companies face three or more types of physical hazards today, such as dangerous heat, water scarcity and flood risk. Around 25% of asset-owner equity value sits in areas of high hazard exposure, meaning 9 out of 10 on MSCI’s scale of physical-risk severity.  

• “Let’s put aside the conversation on what scenario we believe in, physical risk is impacting companies and investors today,” noted Lisa Eichler , MSCI’s head of physical risk and nature solutions, at a breakfast with investors, adding that investors are moving their attention from modeling climate scenarios 50+ years out to managing the physical risks already impacting portfolios within a one- to five-year horizon. 

• The findings underscore the growing financial relevance of physical risk as extreme weather events intensify. Analysis by MSCI Research finds that physical hazards could cost the largest listed companies an estimated USD 1.3 trillion in potential losses from damage to assets and lost revenue over the next year.  

• Integrating geospatial intelligence can help investors assess the resilience of companies and portfolios to physical risk, including repricing exposures or pursuing resilience-linked investment opportunities, explained Lisa, who noted that for both physical and nature risk, MSCI examines exposure at individual locations that we aggregate to the company and portfolio level.

A report by the MSCI Institute in the lead-up to São Paulo found in a survey of risk, operations and finance officers at 550 companies in the most physical risk-exposed industries, nearly all (94%) have conducted or are conducting site-specific physical risk assessments, and that more than 80% say their operations have been directly disrupted by extreme weather events such as severe storms, dangerous heat or flooding in the past five years.  

• The report framed the conversation at an Institute-convened roundtable, where investors observed that while companies tend to play defense when it comes to physical risk, markets also need stronger signals to encourage companies to invest in resilience. “Most companies are good at reacting to physical risk versus making it a competitive advantage,” said one asset owner. At the same time, “investors are not giving companies a lot of credit for investing in cost avoidance and capturing long-term benefits.” 

• “We find a challenge with our investors that to tell them you’re going to save money by avoiding risk and loss in the future does not exactly get their pulses racing,” shared one asset manager. “They want to know what to buy. If we can price in resilience, we can send to the market a signal to invest in it.” 

• Investors noted that demand for resilience solutions is creating opportunity. “Resilience is already an investable theme, and our clients are making money in these companies,” said one investor, citing companies ranging from environmental solutions providers to suppliers of industrial and residential cooling. “The management teams don’t even know the term ‘adaptation.’”  

• Policy matters. A lot of private investment in adaptation ties to national adaptation planning (a key focus for COP30) yet "the distinction between public and private investment requirements is a bit nebulous," commented one asset owner. "How do you make sure that national adaptation plans recognize a distinct role for the private sector?" 

The importance of high-integrity carbon markets 

With harmonization of carbon markets a key objective for COP30, carbon markets are poised to play a key role in channeling private-sector investment for climate action. Carbon projects designed to keep forests standing can provide a meaningful source of finance to support climate action and conserve nature in developing countries, provided investors can identify and back high-integrity projects that deliver measurable climate and financial value.  

• “Transparency on the corporate use of credits is now becoming much more important,” stressed Guy Turner , MSCI’s head of carbon markets, at a forum on integrity in the market for nature-based carbon credits. Guy noted that integrity also will be increasingly needed for scaling emissions trading between countries under Article 6 of the Paris Agreement. “The good news is, the projects being developed now are much higher quality than the ones that are already registered,” he observed.  

• An analysis published by the MSCI Carbon Markets team shows that landholders in Brazil could earn an additional USD 37 billion per year from selling carbon credits from forests than developing land for timber or agriculture. The analysis compares the financial returns of different land use for each square kilometer in Brazil and is derived from MSCI’s global model covering all countries. 

• For their part, countries meeting at COP30 have identified carbon trading as a potentially meaningful source of climate finance for developing countries. The so-called Baku to Belém Roadmap suggests that Article 6 mechanisms and the development of high-integrity standards for carbon markets may provide an avenue for future private investment. Meanwhile, an agreement last week by the European Council would let EU member states use high-quality international carbon credits toward a portion of their national climate targets. 

• MSCI has published a series of recommendations from carbon-credit buyers, sellers and market participants for how governments can scale action and attract investment for international emissions trading from both the public and private sectors. 

Private-sector investors and the energy transition 

Among the priorities at COP30 will be to accelerate implementation of the Paris Agreement by translating climate commitments into action. Countries’ current policies would cause average global temperatures to rise 2.8°C (5°F) above preindustrial levels, according to the latest U.N. report, which measures the gap between global emissions and the amount of carbon cutting required to limit warming in line with global goals. Most companies and investors surveyed by the MSCI Institute say they also expect global warming of around 2.8°C this century. 

• MSCI’s latest Transition Finance Tracker shows evidence of company progress in decarbonizing. In the decade since the Paris Agreement, listed companies in developed markets have reduced their emissions by 18% even as their revenues have increased significantly. Emissions of listed companies in emerging markets have continued to outpace revenues – reflecting those economies’ energy needs – to become the major contributor to global emissions from listed companies.  

• The quarterly report also shows that private-sector investors continue to invest in clean technologies. Assets in public climate-themed funds more broadly rose nearly 12% in the first nine months of the year, to USD 625 billion, extending the double-digit growth of recent years. 

• “The investments are happening, the returns are happening, and companies are focused on the transition,” Richard Mattison told investors on Thursday in São Paulo. At the same time, with headwinds and tailwinds differing across technologies and sectors in each jurisdiction, “we need to focus on near-term action,” he suggested. “That’s true up and down every capital-allocation decision, whether you’re an asset owner with a long-term plan, or a company looking at its supply chain.” 

Discover what’s next in physical risk and the energy transition. Explore MSCI’s climate events and insights.