Hurricanes assailed roughly half the real estate issuers in MSCI’s all country world index (ACWI) during the three years from 2022 to 2024, capturing about 10 per cent of their collective assets in some degree of the maelstrom. Newly released analysis from the investment research firm ranks real estate and utilities as the most risk-exposed among 11 publicly traded sectors, while its real-time linking of hurricane events to stock/unit performance shows a general hit for all affected issuers in the index.
MSCI analysts uncovered a pattern of “statistically significant underperformance” relative to the index benchmark for issuers with storm-struck assets. This typically took form as a steadily worsening drop over the course of 30 business days following an event. The steepest slope of decline was seen during the first two weeks, but returns continued to diminish from there. Among the 20 per cent of issuers with the greatest share of compromised assets (fifth quintile), analysts found average returns fell more than 1,400 basis points (bps) below the index benchmark by day 30.
“The magnitude of market underperformance increased with the concentration of asset or revenue exposure to hurricane-affected areas,” observe the report’s authors, Xinxin Wang, Katie Towey and Elchin Mammadov. “The real estate and utilities sectors are the most sensitive to hurricanes and face elevated downside risk due to the concentration of their fixed physical assets and outputs.”
The data is drawn from MSCI’s geospatial dataset, which pinpoints the location of more than 2 million corporate assets, cross-referenced with International Best Track Archive for Climate Stewardship (IBTrACS) to identify all tropical cyclones reaching at least Category 1 calibre in 2022, 2023 or 2024. Assets falling within a 200-kilometre radius of the centre of those storms were deemed to be in the range of impact, and the issuers of those assets were targeted for the study.
Accounting for potential variables, analysts then assessed each issuer’s cumulative variation from the ACWI benchmark average during the five days preceding and 30 days following a hurricane event. Affected issuers were subdivided into five quintiles based on their degree of exposure through either affected assets or output. The analysts also evaluated the volatility of returns over the course of the 35-day period, sectoral and regional variations in impact patterns and the tail risk, or propensity to vastly underperform or overperform past averages.
Fallout for investors is contingent on the mix of sectors and issuers in their portfolios. Immobile physical assets present challenges for both real estate and utilities, but the vulnerability profile differs in the two sectors. Real estate reflects a larger number of properties dispersed across broader ownership, while a smaller number of facilities, with associated infrastructure, underpin a relatively greater share of productive output in the utilities sector.
This represents two types of systemic risk potential — if or when hurricane events either affect a vast number of issuers or more selectively undermine a smaller number of large-cap issuers. MSCI analysts also note that many information technology (IT) and industrial issuers that experienced hurricane impacts during the three-year study period have large weights within the index that “may contribute to outsized hurricane exposure in portfolios”.
Business operators and investors are advised to consider these risks as they make decisions. A proposed framework for doing so draws on six components that are common features of various recognized standards, including the International Sustainability Standards Board (ISSB), CDP (formerly the Carbon Disclosure Project) and Network for Greening the Financial System (NGFS).
That begins with identification of potential hazards — i.e. the type, frequency and intensity of climate hazards that can be expected — matched with location-specific modelling to forecast the degree of exposure within a portfolio. Next, investors should assess each asset’s vulnerability to damage or shutdown based on its structure, design and reliance on off-site supplies and services, which will inform an associated estimate of the financial consequences of calamitous events that could damage the asset and/or disrupt business operations and revenues. Finally, companies and investors should evaluate their readiness to withstand and respond to climate-related risks, and consider implementing adaptation measures that could boost resilience.
Asset-level data is key to all those exercises. MSCI analysts recommend that investors consider the seasonal characteristics of hurricane risk in their hedging strategies, and they underscore the broader picture of potential risks.
“Often, losses related to business interruption exceed asset damage costs. Even when real estate firms report minimal direct costs from property damage or rental income losses, they often face broader financial impacts. These include higher insurance deductibles and premiums, as well as increased costs for materials and labour in hurricane-affected regions,” the report states. “Although our analysis focused on stock performance during hurricane events, the market response may not be immediate. For example, shares in railroad operator CSX Corp. fell 4 per cent after its 2024 Q3 earnings report showed higher-than-expected rebuilding costs and lost revenue related to the Hurricanes Helene and Milton.”
