Extreme weather brings need to stress-test investments

Published 1:00 am Saturday, August 2, 2025

The summer of 2025 is already shaping up to be one of the most climate-intense in modern memory. From deadly heat domes across the American Southwest, to catastrophic floods inundating the Midwest, to an unusually early and aggressive Atlantic hurricane season, the message is clear: climate volatility isn’t coming – it’s here. And it’s not just a humanitarian and environmental crisis; it’s a financial one too.

According to the National Oceanic and Atmospheric Administration, more than a dozen billion-dollar weather disasters have struck the U.S. since May alone. Historic floods in Iowa wiped out croplands and infrastructure. Phoenix saw its hottest July on record, with 26 consecutive days above 110 degrees. Meanwhile, Hurricane Alberto made landfall unusually far north in Texas, with flash floods following its path through the central states. 

The global insurance sector is bracing for another punishing year, and energy and agricultural markets are spiking unpredictably. If this isn’t reason enough to reevaluate your investment risk exposures, nothing is.

What climate chaos means for a portfolio

Markets don’t price risk efficiently when the risks are systemic, nonlinear or emerging faster than models can update. Climate-induced weather events check all three boxes.

This summer’s turmoil underscores several investor blind spots:

• Geographic overexposure: If you’re overweight in municipal bonds or real estate in climate-vulnerable areas (e.g., coastal Florida, the Gulf, inland flood zones), you’re exposed to growing climate risk that’s still underpriced.
• Sector concentration: Insurance, agriculture, utilities and transport are highly sensitive to weather extremes. These sectors could face both short-term volatility and long-term business model stress.
• Supply chain fragility: As floods and storms disrupt infrastructure, companies with opaque or highly localized supply chains face operational shocks that ripple through earnings.
• Policy lag risk: As climate disasters increase, so does regulatory intervention – think carbon taxes, zoning restrictions, emissions caps. Portfolios exposed to high-emissions industries or climate laggards are increasingly vulnerable to abrupt policy shifts.

In short, weather risk is financial risk. It’s time to move beyond ESG labels and actively integrate climate stress into your asset allocation and risk management frameworks.

How to stress-test a portfolio (without panic-selling)

Stress-testing isn’t about making apocalyptic bets. It’s about resilience and preparedness. Here’s how to start:

• Run climate scenario simulations. Work with your advisor to run climate scenario modeling. Use tools (like MSCI Climate VaR) to simulate how your portfolio might perform under different warming and disaster scenarios – e.g., a 2 degrees Celsius world vs. a 3 degrees Celsius world, or frequent Category 4 hurricanes hitting Gulf states.
• Check for geographic clustering. Drill into your real estate, REITs, muni bonds, and equity exposures. Are you inadvertently concentrated in drought- prone western states? Coastal zones facing sea-level rise? Use GIS maps and climate risk scores to assess physical risks.
• Evaluate insurance sector exposure. Insurers are facing margin compression due to skyrocketing claims and reinsurance costs. If you hold legacy insurance stocks or ETFs, review their exposure to property and casualty lines in high-risk regions.
• Reassess utility holdings. Utilities are increasingly at risk from both physical damage (wildfires, grid failure) and stranded asset risk as regulatory pressure intensifies. Tilt toward utilities that are aggressively investing in grid resilience and renewables.
• Look for resilient themes. Resilience can be a moat. Companies in adaptive infrastructure (e.g., flood defenses, water tech), sustainable agriculture and renewable energy often benefit from both policy tailwinds and growing market demand. The same goes for technologies that help businesses decarbonize or become climate-resilient.
• Review your emergency liquidity. Stress-testing isn’t only about investments. Severe weather can delay insurance payouts, shut down banking systems or restrict access to credit. Maintain a three to six month emergency fund in a liquid, low-volatility account.

Bottom line: Don’t wait for the next storm

The summer of 2025 is a case study in the financial consequences of underestimating physical climate risk. Wild weather isn’t an aberration anymore; it’s the new backdrop for investment planning.

Stress-testing your portfolio now isn’t overreaction — it’s good stewardship. And it’s a crucial step in ensuring that your financial future can withstand not just market cycles, but planetary ones too.

Stacy Bush is with Bush Wealth Management. This information should not be construed by any client or prospective client as the rendering of personalized investment advice. For more information, visit BushWealth.com for its full disclosures.