(Bloomberg) --

Record high temperatures are fueling climate conditions that put more lives at risk through unprecedented drought, floods and storms.

The global heat wave is also having an effect on the financial world. The calamity has provided a stark reminder of how asset managers are struggling to assess the impact such physical climate risks have on their investment portfolios.

“I don’t think the market understands the direct and indirect risk” facing corporate assets from climate-related disasters, says Matthew Wright, a research analyst at Impax Asset Management Group Plc, which runs one of the world’s biggest investment portfolios geared toward a low-carbon economy.

Impax’s portfolio broadly excludes many companies that derive any direct revenue or profit from thermal coal, oil or gas, and instead focuses on companies involved in areas such as renewable energy, water protection and food-waste reduction. But even the physical assets of these companies can be threatened by high heat, water scarcity and other physical impacts.

The problem, Impax says, is that it can’t easily measure that risk. “The lack of asset-location data is a real barrier,” Wright says. In the case of exposed infrastructure, for example, “some geographies aren’t set up for the thermal ranges we can expect in the future.”

The world just had the hottest week on record, according to preliminary data published by the World Meteorological Organization. It follows the hottest June on record, spurred in part by unprecedented sea-surface temperatures. The recent heat waves—attributable to global warming caused by greenhouse gas emissions—have been exacerbated by the weather pattern known as El Niño.

“The situation we are witnessing now is the demonstration that climate change is out of control,” António Guterres, secretary general of the United Nations, said in a July 7 post on social media.

High temperatures are causing deaths and bringing misery to millions of people spread across the globe. They also are creating challenges for corporate workforces, infrastructure and supply chains. 

India’s rapeseed production and Spain’s strawberry crop have taken hits. Blackouts are becoming more common in Asia as usage of air conditioners and refrigeration increases. US electricity grids also are strained and the UK’s workplace regulator has reminded companies to protect their employees whether they work inside or outdoors.

The industries most affected by rising temperatures range from construction companies, which rely on manual labor, to agriculture, where yields often fall as temperatures rise, and transportation, which can be affected by heat-impacted roads, low water levels in rivers and buckling train tracks.

More than 90% of the world’s largest companies will have at least one asset financially-exposed to climate risks such as water stress, wildfires or floods by the 2050s, according to research by S&P Global Sustainable1, a unit of S&P Global. Assets can include factories, warehouses and data centers.

The warming pattern is a conundrum for asset managers, since they generally aren’t good at modeling short-term investment risks associated with heat waves and other location-specific disasters.

In 2020, London-based Impax teamed up with the New York State Common Retirement Fund to ask US companies in the S&P 500 to voluntarily disclose the locations of key assets—such as buildings, facilities and installations—whose loss or impairment would impact their financial results. 

Only 13% of the companies responded. Of those that did, just three demonstrated they had seriously considered their potential liabilities from climate-related damages and had plans in place to reduce or adapt to those risks, according to Impax. Most simply provided “the occasional boilerplate sentence in a financial report to the effect that natural disasters may cause unspecified harm in the future,” the asset manager said.

“We’re disappointed at the level of understanding and disclosure,” Wright says.

Impax’s concern about heat waves got a jolt last summer when soaring temperatures disrupted London data centers used by Alphabet Inc. and Oracle Corp. The asset manager says it wondered about its own exposure to other companies that operated or relied on data centers. This was especially the case with Asia, where high average temperatures can reduce water availability and make it difficult to keep servers cool.

“These are massive physical assets, and they’re just stuck there—fixed in place,” Wright says. “That’s a risk to us.”

In partnership with the UK Centre for Greening Finance and Investment at the University of Oxford, Impax published findings in April about two Asia data center assets in its portfolio. The asset manager calculated that heat waves may cause one of the unidentified companies a projected average loss of about $30 million per year by 2050, while the other company had a slightly lower projected annual loss.

Wright says it’s likely the estimates don’t reflect reality, and that the true numbers are probably a lot higher.

“We think all companies are exposed to physical risk in some way,” Wright says. “It’s frustrating when they say they aren’t concerned.”

 

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