Extreme heat and unreliable water supplies are threatening asset valuations across a growing number of sectors as everything from labor productivity to energy costs gets impacted, an analysis by Moody’s released on Friday showed.
“Heat and water are no longer separate perils moving on separate timelines,” Moody’s managing director and head of catastrophe modeling for insurance solutions Mohsen Rahnama said. “They are converging, and doing so quickly.”
For investors, “both perils translate into operational risk, earnings volatility and stranded-asset exposure,” he said.
Photo: Bloomberg
This year is on track to be the hottest recorded in human history. In Europe, the fastest-warming continent, heat has exposed huge gaps in the region’s preparedness as its infrastructure buckles. Economists are already warning that disruptions to harvests, commodity supplies and the ability of humans to function would hit inflation and GDP.
Heat and water risk are starting to “weigh on values” in the real estate sector, Rahnama said.
Such impacts, left unpriced, “can quietly erode cash flows and portfolio returns” for firms in sectors spanning agriculture, the manufacture of apparel and of semiconductors, he said.
The upshot is that investors need to adapt to a “new risk landscape” created by extreme weather conditions, as the impact of heat and water scarcity morph into permanent risk features, Rahnama said.
“Reinsurers, banks and investors are watching these same trends closely, given their reach across regions and their role in how capital moves in response to physical risk,” he said.
In the US, Moody’s said a sample of about 159,000 water-intensive facilities revealed that close to 49,000 might face high or very high water stress in the decades ahead.
Most are concentrated in Texas and California, while more than 60 percent of the facilities reviewed are used for heavy manufacturing and processing.
About one-quarter are used for producing food and drinks, while 14 percent are for mining and quarrying, the report said.
Such risks can be hard for insurers to capture, due to the slow-moving nature of the damage done.
“Traditional indemnity cover sits awkwardly with chronic risk,” Rahnama said.
However, “losses from heat and water stress build slowly, are hard to model precisely, and tend to strike many policyholders in a region at once, overwhelming the usual diversification,” he said.
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