News & media Integrating Climate Risk in Private Markets: the New Imperative
The rising frequency and severity of extreme physical events in recent years demonstrates that the physical consequences of climate change are becoming more financially disruptive. The World Economic Forum’s Global Risks Report 2025 ranks climate inaction and extreme weather as top global threats over the next decade. Meanwhile, Swiss Re’s 2025 climate resilience report estimates that climate-related damages are costing the global economy over $300 billion annually, most of which remains uninsured, increasing overall financial risk exposure.
The urgency of better integrating climate-related risks is compelling investors to rethink how they integrate climate risks into their decision-making process. The need for integration is highlighted by the UN Principles for Responsible Investment (UN PRI) recently releasing Assessing physical climate risk in private markets: A technical guide, providing private market investors with a practical framework to assess and manage physical risks of climate change across their investment, marking another significant step in providing guidance adapted by asset class.
Why Climate Risk Matters
To illustrate this necessity, let’s take the agriculture sector, for example, which has a high impact but also high exposure to climate change. Recent events, such as the intensified El Niño patterns have led to severe droughts and floods across Latin America. In countries like Peru and Ecuador, heavy rainfall and flooding damaged key infrastructure and reduced yields of export crops underscoring how these growing climate risks are disrupting agricultural productivity and supply chains.
While often discussed on a macro-level, these climate risks have more concrete smaller-scale examples that can be observed and planned for. Increasing temperatures can disrupt the plants’ physiological balance, forcing them to divert energy from fruit production toward cooling processes like transpiration. This stress can lead to smaller yields or even crop failure, triggering sharp production shocks. However, the market response to these shocks is uneven: while some crops, like blueberries, see significant price increases that help offset losses, others, like avocados, show limited price movement, leaving producers more financially exposed. Understanding market dynamics enables investors and investees to proactively discuss commercial and financial strategies, such as maintaining redundant cash buffers, or even building convex derivative strategies when traded commodities are exchange listed.
As climate impacts materialize, policymakers around the world are developing regulatory packages to support both adaptation and mitigation efforts in support of Nationally Determined Contributions (NDCs) and global resiliency. This creates a dual threat for investors: the direct physical risks (such as asset damage or disrupted operations) and transition risks (new compliance requirements, carbon pricing, and technology shifts).
To frame it another way, let us assume that a renewable energy project is located in a hurricane-prone region. Not only is it at risk of operational shutdowns due to storm damage and grid failure, but evolving insurance premiums and local adaptation codes could materially alter the project’s cost structure.
In cases like the above, failure to anticipate and adapt to physical climate risk could compromise an asset’s viability. Integrating climate risk assessments into the investment decision-making process is no longer an option; rather, it is fundamental to upholding long-term value. Ignoring such risks now could mean holding stranded or impaired assets in the future.
As such, despite the recent political backsliding of recent months, the fundamental threat of climate change remains. As physical climate impacts grow more acute and frequent, regulatory responses are likely to regain momentum. This is why we believe the latest decision by The Securities and Exchange Commission (SEC) to end its defence of the rules requiring disclosure of climate-related risks is a step backward, potentially undermining both investor interests and sound capital allocation.
Conversely, a few weeks ago, the Basel Committee on Banking Supervision, the leading global authority on banking standards and policies, published a long-anticipated framework on climate-related risk disclosure aimed at internationally active banks and national regulators. While still voluntary, this underscores the importance of integrating climate-related financial risks into supervisory practices, and signals that more standardized and mandatory disclosure may follow.
Navigating the Evolving Landscape of Climate Risk Assessment
There is currently no universally accepted methodology for measuring and managing climate risk, particularly the consequences of extreme physical risk in private markets. However, tools and approaches are rapidly evolving and consequently being included in investment processes.
At a more practical level, most institutions use frameworks such as the TCFD and GRI to identify exposures by region and sector, but these frameworks primarily focus on disclosure and therefore offer limited application in terms of direct risk management. While they provide valuable insight into how to consider broad climate risks, these exposures need to be quantified and integrated systematically into the pricing of assets and that of financial instruments offered.
To address this gap, the financial industry has started to employ various quantitative models and analytical tools for climate risk assessment such as;
- Econometric models including panel quantile regression, sensitivity analysis, parametric and non-parametric simulations to examine relationships between climate variables and financial health indicators such as non-performing loans
- Value at risk (VaR approaches) which estimate the potential financial loss due to climate-related shocks
- Discounted Cash Flow (DCF) adjustments which incorporate transition or physical risk adaptation costs in future cash flow projections, in addition to adjustments to the discount rate.
- Provisioning for future costs of adaptation and mitigation
- Climate-adjusted credit risk models reflecting how exposure to climate risks may impact the credit profile of a borrower
- Scenario analysis and stress testing using NGFS framework for example to assess at a portfolio level the exposition to climate risks under different scenarios
As more effective methods to account for climate risks are being developed and gaining in popularity, so are their inclusion in financial models, asset valuations and portfolio risk assessmentswhich point to a growing awareness within the financial industry of the necessity to consider and assess climate risk alongside all other risks. Climate scenario analysis has become a cornerstone methodology, though one that is not without challenges compared to traditional scenario analysis. The main challenges are unreliable data, inconsistent regulatory expectations across jurisdictions, and methodological limitations, especially when forecasting nonlinear climate effects. Nonetheless, we believe that these can be bridged with a pragmatic, data-driven approach.
Cordiant is working on developing proprietary tools to better quantify the impact of climate extremes, like floods or heatwaves, and even longer-term climate change results such as increases in temperatures, on an investee’s financial resilience. These tools feed into our financial risk assessment, allowing for adequate provisioning, custom loan structuring, dynamic covenanting, and valuations that recognize the real financial consequences of climate stress.
While integrating climate risk into financial models remains methodologically imperfect, since most methodologies are backward-looking, the cost of inaction is becoming too high to ignore. For private debt and equity investors, especially those involved in value creation strategies like Cordiant, early climate integration can safeguard and enhance asset value to the benefit of investee companies and investors alike.
Authored by:
Thiago Gil | Managing Director, PhD Candidate – Finance
Adriana Danaila | Senior ESG Analyst
Melissa Paris St-Amour | Senior ESG and Impact Associate