Impax Asset Management Group Plc, which oversees about £40 billion ($50 billion) in client assets, has found that portfolio companies generally don’t know how extreme heat can affect their valuations.
Heat waves “are a threat to revenue loss, productivity and the supply chain,” Matthew Wright, a research analyst at Impax who specialises in studying the fallout on asset values of climate change, said in an interview. The phenomenon has the potential to disrupt all sectors, but some are more vulnerable than others, he said.
“It’s something asset managers really need to think about,” Wright said.
The planet just endured its hottest week on record, according to preliminary data published by the World Meteorological Organisation. The United Nations agency expects global temperatures to continue to surge in the next five years, fuelled by heat-trapping greenhouse gases and a naturally occurring El Niño event.
Impax’s analyses show that some companies’ labor forces are particularly at risk. “There’s a real productivity impact when temperature goes up,” Wright said. That’s especially true of construction companies and other businesses that require workers to toil outdoors, he said. Even if global warming is limited to 1.5C by the end of the century, the accumulated financial loss due to heat stress is expected to reach $2.4 trillion by the end of this decade, according to a 2019 report by the International Labour Organisation that examined the links between heat stress and labor productivity.Wright said Impax was particularly struck by reports showing how extreme heat can affect portfolio assets in the tech sector. Last year, soaring temperatures disrupted London data centers used by Alphabet Inc.’s Google and Oracle Corp., and left computer servers at risk of overheating.
“It’s something we had considered before,” he said. “But to see it in black and white was shocking.”
Impax has since studied the impact of heat on two Asian data center assets in its portfolio. It estimates that heat waves could cause one of the data-center companies, which it didn’t identify by name, to lose an average of about $30 million each year by the middle of the century.
“Even knocking out a data center for a day or two is material to them, and to those who rely on them,” Wright said.
For that reason, Impax wants portfolio companies to help it gauge their exposure to heat and other physical climate risks. “We want to know where your assets are,” he said.
“When companies can put a number on it, it’s invaluable to us,” he said.
But most companies are woefully unprepared, if previous studies are any guide.
In 2020, Impax teamed up with the New York State Common Retirement Fund to ask US companies in the S&P 500 to disclose the locations of vital physical assets whose loss or impairment might potentially hurt their bottom line. Only 13% responded. And just three companies could show they had solid plans in place to counter the risk.
Most companies just added “the occasional boilerplate sentence” to describe unspecified financial harm that climate disasters could cause in the future, according to Impax.
There’s already considerable evidence that companies and their investors face meaningful losses if they don’t prepare for the succession of heat records ahead.
Food producer Unilever Plc has warned that drought in Spain will cause this year’s tomato crop to decline “significantly” following a 40% slump in 2022. The cost of transporting fuel on the Upper Rhine jumped this month, as low water levels restrict the volumes that barges are able to carry.
Brookfield Asset Management, which also is one of the world’s largest owners of prime office properties, says it’s monitoring the fallout of extreme heat on concentrated clusters of assets in Australia, Los Angeles and Houston.
For now, it judges the potential for losses to be low overall. “We are mitigating risk at the property level, where possible, by investing in heat resilience measures,” Brookfield said in its 2022 sustainability report.
Under a business-as-usual scenario, more than 90% of the world’s largest corporations will have at least one asset that’s financially exposed to climate risks such as water stress, wildfires and floods by the 2050s, according to data provided by S&P Global Sustainable1, a unit of S&P Global. More than a third of those companies will see at least one asset lose 20% or more of its value as the planet heats up.
Lisa Beauvilain, head of sustainability and stewardship at Impax, says that the companies managing physical risks “best today among our holdings are insurance companies, some electric and water utilities and food companies. These tend to be sectors with significant potential negative exposures to physical climate risks. In our experience, European companies are somewhat over-represented among the better performers.”
Sub-sectors particularly at risk from high heat or water scarcity include pulp and paper mills, thermal power generation, agriculture and cold storage assets such as supermarkets and food transport, according to Impax.
“I don’t think the market understands the direct and indirect risk” facing corporate assets as a result of climate change, Wright said.
