Home ESG Investors Beware – Heatwaves Pose New Risks

Investors Beware – Heatwaves Pose New Risks

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Believe it or not, the number one cause of weather-related deaths in the U.S. is extreme heat. While heatwaves don’t trigger the dramatic headlines that natural disasters generate, they should be on you radar screen—especially if you invest in utilities, infrastructure stocks, municipal bonds, or commodities.

From 2004 through 2018, exposure to excessive heat contributed to 10,527 deaths, with the majority (90%) happening in the summer months of May through September, according to the Centers for Disease Control and Prevention. As these numbers are updated, they will undoubtedly show that this menacing trend is accelerating across the globe.

“July 2023 remains the hottest month ever recorded,” according to Reuters. “August’s record [heat] makes the northern hemisphere’s summer the hottest since records began in 1940.”

ESG experts are raising the alarm.

“Calling all municipal debt investors in my network,” wrote ESG expert Alessia Falsarone in a recent LinkedIn post. “Have you added heat-related deaths as part of your climate change indicators in your credit assessments yet?” Falsarone is the author of “The Impact Challenge” and leads the University of Chicago’s Circular Economy and Sustainable Business Management program. “Monitoring sea-level rise, carbon mitigation, and waste reduction are all part of building resilience in our communities,” Falsarone wrote. “Excessive natural heat has quickly become the fourth variable in resilience planning for urban development. Investors beware.”

The urgency of this crisis prompted Miami-Dade, Florida to hire the world’s first Chief Heat Officer in 2021. Since then, other major cities like Phoenix, Los Angeles, and Miami have followed suit, along with other large cities and districts around the world, according to the BBC.

Chief Heat Officers are responsible for developing emergency response protocols for record-high temperatures and the long-term planning needed to prepare cities for a hotter future. They draw up plans to reduce summertime temperatures in urban areas by planting trees to improve canopy coverage, retrofitting large buildings with heat-absorbing roof tiles, and installing cooling systems in affordable housing developments, especially for the seniors who are most vulnerable to the health concerns that come along with rising temperatures.

Excessive heat also raises important questions for investors, as publicly owned companies and municipal bond issuers involved in transportation, distribution, utilities and infrastructure discover intense heatwaves pushing materials and equipment beyond their temperature thresholds.

“The vital infrastructure that modern society depends upon could buckle and even break as power lines, refrigeration units, roads, and rail lines simultaneously fail,” according to the consulting firm BSR. “Businesses can adopt a blended response that focuses on adaptation, resilience, and mitigation to counter this threat.”

In fact, just about every large, publicly held company in the U.S. is affected by rising temperatures, according to the Harvard Business Review. “Two percent of total working hours are projected to be lost each year due to heat stress at work, representing more than $4 trillion annually by 2030, HBR reported in July. “So, when 100 million Americans are under a heat alert, that could mean up to one in three employees—or more, depending on your company’s geography—are at risk at a given time.”

Extreme heat also could present insurance companies with an increasing number of claims for weather-related damages, employee disability, and supply chain interruptions.

Still, there are plenty of good reasons to own infrastructure and utility stocks, not the least of which is their potential to enhance diversification and reduce risk in your portfolio. Stocks related to real, tangible assets tend to have low performance correlations to mainstream stocks and bonds, can help fight inflation, and often generate steady dividends (albeit with more modest returns than the broader market). The S&P Global Infrastructure Index returned an average of 5.9% annually over the past 10 years, while the S&P 500 Index returned 12.4%.

In response, investment professionals who own infrastructure stocks are gradually going green. A report issued by the UK law firm Linklaters at the start of the Covid pandemic found that mutual fund managers were planning to increase their eco-friendly infrastructure holdings by more than one fifth in 2022. They were most interested in companies that manufacture materials for climate-resilient buildings and infrastructure for electric vehicles. The Inflation Reduction Act (IRA) of 2022 allocates $370 billion to clean energy and green infrastructure projects over the next ten years.

One note of caution for ESG investors: Renewable energy is still in the formative stages, so supplies can be unpredictable, according to analysts at Loomis Sayles. “As [fossil fuel] resources retire, power grids could experience stress if demand spikes from heatwaves and increased temperatures coincide with a period of lower renewable supply,” the investment firm reported in 2022. “We believe that power providers will need to carefully manage this transition by ensuring access to adequate supplemental power and storage capacity to maintain grid stability.”

ESG investors know that climate change presents real financial risks for the companies they own. Now you can add extreme heat to the list. Examine those corporate sustainability reports carefully.

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