Extreme weather events: the investment implications

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This article was written by Impax Asset Management, a specialist asset manager investing in the opportunities arising from the transition to a more sustainable global economy.

More extreme weather – witness the high incidence of hurricanes, wildfires and flooding in 2017 – looks set to boost demand for backup and portable power generation and equipment to clean up and repair large-scale damage, but will also require more long-term planning around – and investment in – storm resilience, including upgrades of water infrastructure, for example, to treat water during tidal surges and floods.

A catalogue of extreme weather events in the last 18 months

2017 was one of the most active hurricane seasons on record. The US suffered six severe hurricanes. The season is estimated to be the most costly ever, causing USD 300 billion to USD 475 billion worth of damage in the US alone. For reference, the most expensive natural event in US recorded history, 2005’s Hurricane Katrina, caused damage costing up to USD 250 billion.

Source: Climate Central, as of 20/12/2017

This winter, Florida residents saw snowfall for the first time in 30 years as the US east coast was battered by major storms. On the west coast, Californians first suffered droughts, then the largest wildfire in the state’s history, followed by catastrophic flooding and mudslides.

Major flooding hit India, Pakistan and Bangladesh, and landslides wreaked havoc in Nepal. In Africa, Cape Town is facing its worst water shortage in 113 years and may soon run out of drinking water, affecting over 40 million people.

Investing in adaptation and mitigation solutions

Immediate responses to extreme weather include the use of backup and portable power generation to replace and supplement downed power systems. Companies that help clean up and repair large-scale damage also see an increase in activity, not just to remove fallen trees and buildings, but also in the identification and removal of hazardous materials.

Source: DOE, National Acadamies, news reports and Rhodium estimates, as of 26/10/2017.

Longer-term planning around extreme weather resilience typically requires huge investment in water infrastructure. For example, water treatment facilities may require upgrading to address contamination during tidal surges and flood conditions.

In addition, the pipes, pumps and sensors that constitute the systems that remove, collect and transport water are getting ‘smarter’. The integration of digital technology allows these systems to monitor and control water management processes more efficiently.

A growing investment universe

We have been researching and investing in the broader water universe since 2002. Over this time, we have seen rapid growth in the investment opportunity with the water investment universe currently numbering almost 300 companies*. Over 15 years’ experience of investing in this sector gives us the insight to identify the most promising companies providing solutions to the increasing incidence of severe weather events.

The rapidly rising demand for such products and services, partly driven by more extreme weather, should lead to continued strong growth and outperformance versus broader global equity markets.

*Source: Impax Management internal data, as of 31/01/2018

Bruce Jenkyn-Jones

Co-Head of Listed Equities, Executive Director, Impax Asset Management

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