Before the Storm Hits

Do hurricanes affect the market? Join us as we cover new research that tracks the financial fallout of storms on company equity. Through asset exposure and climate models, we’ll discuss how storm paths connect to stock prices and why investors may want to take notice, before the next hurricane hits.

Host: Bentley Kaplan, MSCI ESG Research

Guest: Xinxin Wang, MSCI ESG Research

Transcript

Sustainability Now Podcast

Before the Storm Hits

Transcript: 17 October 2025

Bentley Kaplan

Hello and welcome to the weekly edition of Sustainability Now, the show that explores how the environment, our society and corporate governance affects and are affected by our economy. I'm Bentley Kaplan, your host for this episode. And for today's show, grab on tight to the edge of your seats because we are going to rush out ahead of an incoming hurricane, figuratively speaking, we'll be looking at new research into how hurricanes affected the equity performance of companies before and after they made landfall, and how that impact depended on what type and how many assets companies owned in the danger zone. But really, we'll see how getting to these pinpoint measurements relied on a combination of geospatial asset data, physical hazard maps and financial modeling. It's a collaboration that's offering investors a new way of understanding and managing risk, and not just in terms of hurricanes, but many other physical hazards as well.

Thanks for sticking around and being so brave. Let's do this. Andrea, Barry, Chantal, Dexter, Erin, Fernand, Gabrielle, Humberto, Imelda, Jerry, Karen and Lorenzo. That's not a list of our faithful Patreon members, but the 12 tropical cyclones that have hit the Atlantic in this 2025 season. And four of these have intensified into hurricanes with the most recent being Hurricane Imelda at the beginning of October. And the Pacific has had its own share with 19 tropical cyclones so far, 11 of which would classify as hurricanes. A forecast from the US National Oceanic and Atmospheric Administration or NOAA, predicts that this year will have around a 60% chance of being an above-normal hurricane season.

And looking further back, data from the International Best Track Archive for Climate Stewardship shows that from 1990 to 2024, the intensity of hurricanes has been increasing. And if you're a listener that lives in any of the major hurricane corridors, that might be some worrying information. It might also worry you if you're a company with production facilities or warehouses or pipelines or ports, or pretty much any assets that might be in the pathway of these hurricanes. The immediate damage from such an event can be costly and time-consuming to repair.

There are also knock-on effects that will make it harder to restart normal operations. Interruptions in electricity and communication networks have cascading impacts. Damages to road and rail networks can make it harder to bring in raw materials or to move finished products out. But does the market price these damages in? Do hurricanes impact the equity performance of companies with assets and areas that have been hit by hurricanes? And if so, for how long? Well, these are good questions and questions that Xinxin Wang and several of our MSCI colleagues wanted to answer.

Xinxin Wang

You're absolutely right. Hurricane can cause major damage and we have all seen those devastating images when a hurricane making landfall. The damage is just impossible to ignore. But what is less visible is the financial storm that often follows, hitting the market hard. And when a hurricane strikes, what is the real story for the companies in its path? I mean, does the company just shrug it off or is there a much deeper, longer lasting financial hit that maybe investors are not seeing? And that's exactly the question we are trying to answer. We analyzed the equity performance of companies with assets in areas hit by hurricanes between the beginning of 2022 and the end of 2024, over three years of time. And we found that firms with assets located in hurricane paths significantly underperform, even after controlling for market sector and style factors.

And the underperformance is actually built gradually. It gets worse over the first couple of weeks and still goes down at least a month later. And for the companies that get hit the absolutely hardest, the downside is just brutal. We're talking about negative 1,400 basis point, and put that in plain English, that's 14% loss. And that's only the fifth percentile, that's not even the worst. And that's the catastrophic tail risk that we are talking about. 

Bentley

But you also found that these negative impacts weren’t spread evenly over companies, right? Was there some clear contributing factor that predicted which companies would get off lightly, versus seeing more of this catastrophic tail risk?

Xinxin Wang

Absolutely. That is the geographic concentrations of a company's assets or revenue. So companies with concentrated assets or revenue in affected areas consistently underperform more than the companies with diversified asset footprints.

We also found that impact was widespread. During peak storm season, more than half of the MSCI equity index constituents had assets exposed to hurricanes, and that roughly represent three quarters of the index total weight. Sector-wise, the picture was uneven, so utilities show the most pronounced downside probably because their infrastructure heavy assets simply can't move, while information technology and industrial sectors have broad exposure if you just count by number of issuers being impacted. But financial impact really depend on how critical the damaged sites were and how concentrated they were in high risk zones. Last but not least, we did a case study and our case study suggests that firms with stronger management of physical risk or adaptation strategies such as site redundancy and disaster recovery planning, they experience smaller performance declines after the hurricane hit.

Bentley Kaplan

All right, so by using some financial modeling techniques and controlling for key variables, Xinxin and team found that yes, over the past two to three years, companies with assets in hurricane affected areas underperformed. And not just after a hurricane hit, but several days before as well. While many companies were affected, the impact was not evenly distributed. The extent of that under performance depended on the type of assets and how many assets were in those danger zones.

And that sounds intuitive, but to actually get to those results to specific numbers and individual companies, the team of researchers needed a few things to fall into place. One of those was the advancement of climate models and being able to link physical hazards like hurricanes to financial impacts. Because until very recently, the impact of these events or hazards were shown at a general high level, but tying them to individual companies was a very slippery prospect.

Xinxin Wang

Awareness has definitely grown, so investors know that physical risks are intensified in both frequency and severity. But despite the growing awareness, the integration of physical risk into the investment process remains very underdeveloped. So even the largest institutional investors may lack the data, tools or standardized approach to operationalize the physical risk efficiently. Prior climate finance research mainly used macro-finance models or indirect process for exposures with empirical work that often uses measures such as carbon intensity, sea level rise or climate use indices to infer pricing facts. Those studies were informative, but not immediately investible or actionable.

Bentley Kaplan

Right. But very recently, that slightly blurry scene that Xinxin is describing has started to move into sharp focus. Our team of researchers is now able to work at the convergence of three fields, namely climate models, geospatial asset maps and financial models, simultaneously knowing the probabilities of different physical hazards occurring and their intensity, the assets that would be affected by those hazards and the potential financial consequences that companies that own those assets would experience. And by combining these, we can move from knowing that hurricanes have negative financial consequences in general, to being able to look at individual companies, assessing their specific risk and aggregating that across portfolios.

Xinxin Wang

Yeah, absolutely. Our research wouldn't have been possible without the advances in geospatial asset intelligence data that pinpoints exactly where a company assets sit, coordinate by coordinate. That's real advancement. And then we also overlay that with hazard maps that shows each hurricane's landfall and trajectory, and that also requires a lot of precision. 

Bentley Kaplan

OK, but then it’s not just about getting that precise risk exposure, but also having some sense of whether companies with those assets are ready to head that risk off.

Xinxin Wang

Absolutely. We link those assets back to their parent companies and their risk management disclosures. For example, whether they've identified climate risk, integrated into enterprise processes or invested in adaptation, right? These are the measurements that we want to see if the companies are doing or capturing.

This is the result of close collaboration among climate scientists, industry analysts, data engineers and financial experts. And as you mentioned, it's really connecting the dots and leveraging the best of all the different fields, whether it's in physical risk modeling, geospatial asset mapping, or financial modeling in this case. And we are at a very exciting intersection of climate science and finance where the data, technology and processing power, by the way, it's really important, finally let us connect the dots in a scalable and efficient manner and turn physical risk information into actionable investment insights. And that's a very exciting place that we are now.

Bentley Kaplan

It definitely takes a researcher to be genuinely excited about the prospect of translating physical climate risk into financial outcomes and actionable insights, but that's just how we roll here. And as Xinxin points out, part of this insight isn't only coming from measuring company exposure to risk, but also how companies are prepared to handle that risk through things like protective infrastructure, insurance and business continuity planning.

Xinxin's paper looked specifically at hurricanes, but it's part of a broader research effort to understand how different physical hazards might be affecting company performance, and using an overarching physical risk framework to do so. It's essentially a great six-step program that starts with identifying the relevant physical hazard, and ends with estimating financial losses and gauging the level of adaptation and readiness. It's a conceptual approach that helps investors incorporate physical risk into their processes, however experienced they are with climate modeling.

Xinxin Wang

How investors engage with this type of information really depends on where they are in their journey. In our paper, we actually introduce a six-component physical race framework to help facilitate this type of conversation and thinking. Essentially, we introduce this as a common language and depending on where the company really is in their journey, they could be at the very beginning, just really try to wrap their head around, "What kind of hazard is relevant and material to me, based on my portfolio?" And that could be just simply a measuring, mapping exposure exercise for these type of investors in terms of major use cases so they can understand how their portfolios are exposed to different type of climate hazards that are relevant.

Bentley Kaplan

But then presumably, other investors that are already working and familiar with this sort of risk assessment, they would be able to go deeper into understanding more of the specifics, right?

Xinxin Wang

Yeah, absolutely. They may want to actually incorporate some of the other data and tools that we have. For example, how do you or how can investors assess vulnerability? And then from vulnerability, can they come up with financial impact estimate that will really help them to incorporate into the risk management process? For example, if there's a seasonality of the hazard that they are facing, could they incorporate seasonal risk into the risk management process? And if they want to engage, so that's going beyond just measure exposure, understand financial impact, they can also take actions such as engagement.

If they were to engage, which are the companies that they should prioritize with their engagement approach? And then last but not least, they also have other measurement at their disposal or tools at their disposal to manage this type of risk, such as hatching the tail risk away, maybe asset allocation strategy to incorporate the climate risk into the portfolio construction process, and potentially even in terms of insurance. For example, they can also look into the insurance gap if there's any gap that exists and how they can use other methods such as cat bond insurance to mitigate that. In the end, reaching the climate science and finance isn't just about understanding the risk, it's about turning that insight into smarter and more resilient investment decisions that can be action and also can stand the test of time and the next storm.

Bentley Kaplan

And that is it for the week. A massive thanks to Xinxin for her take on the news with a sustainability twist. The research that we discussed on today's show is freely available on MSCI's Research and Insights page. A shorter blog titled Anticipating Hurricane Risk Before It Strikes is a great jumping in point, but if you want to really roll around in the details, have a look for the full paper titled Is Physical Risk Financially Material? A Hurricane Event Study. Both of them would go great with your next cup of coffee. I also do want to say thank you very much for tuning in. If you like what we're doing, then let us know. Drop us a review, rate the show on your platform of choice and tell a friend or a colleague about this episode. Thanks again, and until next time, take care of yourself and those around you.

The MSCI ESG Research podcast is provided by MSEI ESG Research LLC, a registered investment advisor under the Investment Advisors Act of 1940, and a subsidiary of MSCI Inc. Except with respect to any applicable products or services from MSCI ESG research, neither MSCI nor any of its product or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments, or trading strategies. And MSCI's products or services are not intended to constitute investment advice or recommendation to make or refrain from making any kind of investment decision and may not be relied on as such. The analysis discussed should not be taken as an indication or guarantee of any future performance, forecast or prediction.

The information contained in this recording is not for reproduction in whole or in part without prior written permission from MSCI ESG Research. Issuers mentioned or included in any MSCI ESG Research materials may include clients of MSCI or suppliers to MSCI, and may also purchase research or other products or services from MSCI ESG Research. MSCI ESG Research materials, including materials utilized in any MSCI ESG indexes or other products have not been submitted to, nor received approval from the United States Securities and Exchange Commission or any other regulatory body. The information provided here is as is, and the user of the information assumes the entire risk of any use it may make or permit to be made of the information. Thank you.