When a series of devastating wildfires swept across California in 2025, most people saw it as yet another climate-related natural disaster. However, one industry saw something else: a changing risk profile.
Insurance is, at its core, a business of pricing risk correctly. Therefore, climate risk is not treated merely as an abstract environmental issue, but rather an integral part of their financial model. That’s why many of the most sophisticated climate risk models today don’t come from a university or government lab, but rather the insurance industry. Unfortunately, the emerging trends paint a worrying picture: across North America, insurance premiums are rising, coverage is shrinking, and some insurers are exiting high-risk regions altogether. In California alone, State Farm announced it would not renew home insurance coverage for 72 000 homes, citing increasing disaster risks and rising reinsurance costs.
For insurance companies, the reasoning is simple: today’s climate trends will translate into tomorrow’s financial losses. If that is the case, why aren’t we seeing the same type of reaction in financial markets?
Investors face many of the same underlying risks that insurance providers do. Extreme weather can disrupt supply chains, damage infrastructure, and reshape the long-term prospects of entire industries. However, we have seen a much slower reaction to the threat of climate change in the markets, and climate financing continues to lag behind what is needed to mitigate its growing impacts. The problem isn’t personal oversight, but instead structural — quarterly earnings, short-term market sentiment, and lackluster climate disclosure can make it difficult for investors to fully account for risks that take decades to unfold. So, what lessons can we, as investors, adopt from an industry whose success depends entirely on understanding future risks?
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Treat the climate as a financial variable, not just a sustainability issue
Climate change tends to be labelled as an “ESG” or “Sustainability” issue, which often becomes a conversation about values rather than finance. In reality, climate change can have a material effect on a company’s balance sheet: environmental degradation lowers resource availability, extreme weather disrupts supply chains, and rising sea levels threaten existing infrastructure. The insurance industry is acutely aware of the financial risks that climate change poses, which is why climate models are now a core component of their risk analysis.
Investors would benefit from the same shift in mindset. Rather than viewing climate as merely part of a company’s sustainability strategy, investors should consider how its effects will affect future cash flow, competitive positioning, and long-term value creation. In this way, incorporating climate data into investment analysis becomes less about sustainability talking points and more about smart financial behavior.
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Use forward-looking data, not just historical performance
Investors rely heavily on past market performance to predict future outcomes. If an oil-drilling company has two strong years of back-to-back growth, market sentiment would signal that the company is a safe long-term bet. Unfortunately, this strategy only tells half the story, because climate change doesn’t operate on the same time scale as normal business cycles. As the pressures of global warming and biodiversity loss begin to increase, economies will be forced to transition towards low-carbon technologies, and governments will introduce new regulations and disclosure requirements.
Insurers don’t lean on historical data alone, and neither should investors. By incorporating predictive models, such as climate scenarios, national transition plans, and physical risk assessments, into the valuation process, investors can get a clearer picture of how a business or industry may perform over the coming decades. If we run that same oil-drilling company through a forward-looking lens that accounts for shifting energy demand and government regulations, it may no longer look like a safe bet in the long term.
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Price long-term risks before they become short-term problems
Insurance companies don’t wait until a disaster occurs before adjusting their pricing — they actively anticipate whether risks are increasing or decreasing, and they price accordingly. While global markets excel at reacting to immediate risks, long-term structural risks rarely receive significant attention until they begin to visibly affect earnings. Climate-related challenges such as rising temperatures and water scarcity can gradually influence operating costs, asset values, and business security, but because these changes occur over decades, they rarely show up in a quarterly earnings report until it’s too late to get ahead of them.
California’s housing market is a perfect example of this climate risk gap. While home insurance coverage has dropped in response to the increasing risk of wildfires, home values in fire-prone areas have not significantly changed. In other words, insurers are already assigning a higher financial cost to climate risk, while the underlying assets have been much slower at reflecting the same level of risk. Investors who start pricing climate risk earlier, before it forces its way into the numbers, will more accurately predict which companies and industries are built for the future, and which ones are due for a correction.
The takeaway
At Clear Skies, we don’t treat climate impact as a box to check. Assessing climate risk and identifying the investment opportunities it creates is a fundamental pillar of our investment thesis, because climate change touches every link in the value chain. By taking lessons from the insurance industry, a more accurate asset valuation system would allow markets to better price risk — rewarding investors who back resilient, well-prepared industries, and accelerating the capital shift towards addressing climate change.
