Morningstar Sustainalytics Partners with XDI and Veridion on Physical Climate Risk

Morningstar Sustainalytics has announced a collaboration with XDI, physical climate risk specialists, and Veridion, an AI-powered business data platform, to develop a physical climate risk product for asset managers and asset owners that translates asset-level climate hazard exposure into financially relevant investment metrics. The development addresses a key gap in existing climate risk tools where progress in identifying which assets face exposure to floods, wildfires, heat stress and other hazards has not been matched by consistent frameworks for converting that exposure into metrics that support real investment decisions at the portfolio level. A group of asset managers and asset owners will act as partners providing ongoing input on use cases, data needs and integration into existing investment workflows, building on Morningstar Sustainalytics' existing climate offering including its Low Carbon Transition Ratings and Physical Climate Risk Metrics.

 

The Three-Party Technical Architecture

 

The collaboration brings together three complementary capabilities designed to create a more integrated view of physical climate risk than any single provider can deliver independently. XDI will provide asset-level hazard impact analysis through its engineering-based Climate Risk Engines, combining sub-asset data, hazard modelling and forward-looking climate scenarios to estimate how climate hazards translate into operational disruption in a manner consistent with TCFD and ISSB frameworks. Veridion will supply the geolocation and business intelligence layer needed to map companies to their physical assets and operations globally, with its AI-enabled company intelligence platform supporting the connection of corporate entities to physical assets at global scale and feeding directly into XDI's physical asset models.

Morningstar Sustainalytics will integrate each component through its proprietary investment research framework, with a new Asset Materiality Assessment methodology at the core that provides a structured approach to determining which physical assets are likely to be material to a company's core business activities. David Pagliaro, President of Morningstar Sustainalytics, said the collaboration reflects an important evolution in how physical climate risk is assessed and applied in investments, noting that physical asset-level hazard data has become more available but that investors have lacked a consistent framework to determine financial relevance at the portfolio level. He said the approach aims to help institutional investors identify where physical risks are most likely to affect long-term value by connecting exposure, asset materiality and financial impact through business interruption analysis.

 

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The Asset Materiality Assessment and Its Investment Logic

 

The Asset Materiality Assessment represents the most methodologically innovative element of the collaboration, providing a structured framework for distinguishing between climate-exposed assets that are consequential to a company's operations and revenue generation and those whose exposure, while measurable, is unlikely to affect long-term earnings capacity materially. Not all assets exposed to climate hazards are equally consequential for investors, and without an explicit materiality weighting methodology, physical climate risk metrics can misrepresent the financial significance of hazard exposure by treating the disruption of a minor warehouse identically to the disruption of a company's primary manufacturing facility. By weighting physical risk signals by their estimated relevance to operations, revenue generation and long-term earnings capacity, the Asset Materiality Assessment aims to produce metrics that inform portfolio construction and risk management decisions rather than simply cataloguing hazard exposure.

Florin Tufan, Chief Executive Officer of Veridion, said physical climate risk hinges on a deceptively simple question of which company owns what and where, and that Veridion's live company graph answers it at global scale by mapping which assets belong to which companies, where they operate and what activity is occurring at each location. This asset-to-company mapping capability addresses a fundamental data infrastructure challenge in physical climate risk assessment, where the connection between published corporate disclosures and the actual geographic location of operating assets has historically been incomplete and inconsistent. Dr. Karl Mallon, Founder and Head of Science and Technology at XDI, said that for nearly two decades XDI has pioneered physical climate risk analysis with models designed to utilise detailed asset design, construction and materiality information, but that acquiring that level of intelligence at scale has been extremely difficult until Veridion made the rich business and asset data accessible.

 

Market Context and Regulatory Drivers

 

The Morningstar Sustainalytics, XDI and Veridion collaboration arrives within days of MSCI's announcement of its acquisition of First Street for $120 million to expand physical climate risk capabilities, illustrating the simultaneous recognition across major ESG data providers that physically grounded, asset-level climate risk translation into financial metrics represents the next critical development in sustainable investment analytics. Regulatory requirements are a primary driver of this market development, with the EBA's finalised Pillar 3 ESG disclosure framework requiring banks to disclose exposures subject to physical risk by country and hazard type, European central banks using climate risk data to assess loan book vulnerability and ISSB-aligned mandatory disclosure requirements extending climate risk assessment obligations to corporate issuers globally. The TNFD framework's nature and climate disclosures guidance further reinforces the expectation that financial institutions will assess and report on the physical climate risks embedded in their portfolios and financed activities.

Asset managers and asset owners participating as development partners in the Morningstar Sustainalytics collaboration gain the ability to provide direct input on use cases and integration requirements, ensuring the product development is shaped by the practical workflow needs of institutional investors rather than theoretical analytical frameworks that do not translate into daily investment decision-making processes. This co-development model reduces the adoption risk that typically delays institutional uptake of new analytical methodologies by embedding partner feedback throughout the development process rather than launching a completed product that then requires extensive customisation for individual client workflows.

 

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Outlook for Physical Climate Risk as Investment Infrastructure

 

The near-simultaneous announcements of the MSCI First Street acquisition and the Morningstar Sustainalytics, XDI and Veridion collaboration signal a definitive shift in the physical climate risk analytics market from early adoption experimentation toward mainstream institutional infrastructure investment, with two of the largest ESG data providers making significant commitments to expanding their physical risk capabilities within the same week. Whether Morningstar Sustainalytics can deliver a product that genuinely translates asset-level hazard exposure into portfolio-level financial signals that institutional investors can act upon in their daily investment processes will be the critical commercial test of the collaboration's ambition. The combination of XDI's engineering-based physical modelling, Veridion's global asset-company mapping and Morningstar Sustainalytics' investment research framework and existing client relationships provides a technically credible foundation for delivering on that ambition.

Sustained adoption of physically grounded, financially relevant climate risk metrics by institutional investors would accelerate the repricing of climate-exposed assets and create stronger commercial incentives for companies to invest in adaptation and resilience, demonstrating that better climate risk data can drive the capital allocation changes needed to manage systemic physical climate risk across the financial system. The convergence of regulatory mandates, extreme weather event frequency increases, growing fiduciary recognition of climate risk materiality and improving analytical capabilities creates structurally favourable conditions for physical climate risk analytics to become standard investment infrastructure rather than specialist sustainability research within the current decade.

 

Source: BUSINESS WIRE