How a Changing Climate Reshapes Capital Markets

As the climate becomes less stable, we believe it will lead to a reshuffling of the entire system, starting with the most vulnerable sectors:

• Insurance markets begin to crack, as we are now witnessing across the country, as insurers pull out of high-risk areas and drive-up premiums, even in unaffected areas, to cover their losses. And as reinsurance markets re-price risk, it becomes more expensive or impossible to insure property in flood zones, wildfire regions, and coastal areas.
• Agriculture becomes unstable, as we are also now witnessing, as crops depend on predictable seasons, rainfall, and temperature ranges. As climate volatility continues to cause droughts, floods, fires, and other extreme weather events, food supply chains are disrupted, and prices are driven higher.  This doesn’t just impact food production, it also affects entire economies, trade networks, and inflation levels.
• The capital markets will need to adjust to these changes. As insurance becomes more expensive, or unavailable, and property values decline in high-risk areas, wider financial impacts are triggered on mortgage markets and real estate-backed securities. In addition, companies in affected regions will struggle with higher costs and capital constraints, leading to repricing in the stock and bond markets.

All of these factors lead to what we believe is one unavoidable conclusion: capital will flow toward climate adaptation and resilience, and the markets will reward the companies that are best positioned to respond to the structural shift that is taking place.

Climate adaptation and resilience is already happening, as insurance markets are already repricing risk, infrastructure is needing to be rebuilt, and businesses are continually adjusting to new climate realities. We strongly believe that the time to position capital is now, before these themes become mainstream and valuations rise.  

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