Extreme weather events have defined 2023, from Cyclone Freddy sweeping across several African countries, to wildfires in Canada that blanketed eastern North America in smoke, to extreme heat around the world that made July the hottest month on record by a wide margin.
Scientists are increasingly making the connection between extreme weather events and climate change. As the damage from extreme weather events becomes more apparent, we seek in this research to measure the financial costs of climate hazards on corporate assets in different sectors and geographies.
Applying the S&P Global Sustainable1 Physical Risk Exposure Scores and Financial Impact dataset to companies in the S&P Global 1200, we find that by the 2050s the costs of the physical hazards of climate change will equal an average of 3.3% per annum — and up to 28% per annum — of the value of real assets held by companies in the index, absent adaptation. That average per annum figure rises to 6.0% by the 2090s. These costs are annual and cumulative over time, representing a material financial risk for many companies.
The relative size of the financial impact in the 2050s and 2090s under this scenario is similar for the S&P 500.
Some climate hazards will generate more significant financial costs for S&P Global 1200 assets than others, according to our data. Extreme heat is projected to generate the highest cost for companies in the 2050s, in part because nearly all assets will face at least some exposure to extreme heat, whereas exposure to other hazards is more variable. Water stress and fluvial flooding are the second- and third-most significant sources of financial impact for the S&P Global 1200. Water stress refers to the combination of reduced freshwater availability from sources such as rainfall and increased water demand from the general population, industrial use and agriculture.
For example, extreme heat could affect businesses across sectors through lower labour productivity: If it’s too hot, employee health and safety and company operations can suffer. Energy grids can come under pressure as the general population cranks up air conditioning use. Transportation links can be damaged, leading to delays in supply chains.
If we look further ahead to the 2090s, the financial impact of extreme heat intensifies, and hazards that are less severe in the 2050s become more significant, without efforts to adapt.
How climate affects sectors differently
The potential financial impact of climate hazards could influence where a company decides to develop its operations in the future or where investors put their money. A severe drought may decimate a vineyard, while the productivity of a nearby office building might not be affected much at all. Such shifts, in turn, would change the risk profile of businesses and have a knock-on effect on banks, insurers and investors.
Our analysis shows that some sectors are more sensitive than others in terms of the potential financial impact of climate hazards. The location of an asset also influences how high the financial impact can be.
For example, the communication services sector in the S&P Global 1200 would face significant financial impact. The latter is projected at 5.4% per annum of real asset values by the 2050s. This sector includes telecommunications firms, data providers and media companies. Extreme heat would generate the largest impact absent adaptation, followed by water stress, drought and fluvial flooding. In communication services, 97% of real assets with financial impact of 10% or more by the 2050s are data centres, and data centre assets have the highest average financial impact for this sector at 8.3%. Data centres are sensitive to extreme temperatures and restricted access to water due to their dependency on heating, ventilation and air conditioning (HVAC) and cooling.
Extreme heat represents the largest share of financial impact for most sectors in the 2050s. While that holds true further out toward the 2090s, other hazards become much more significant. The financial impacts from coastal flooding and drought become more severe across many sectors.
Data centres
Zooming in on one type of corporate asset — data centres — provides insight into how different climate hazards contribute to financial impact, absent adaptation and resilience measures. Data centres are also worth examining because they are fundamental infrastructure to the digital economy, and they are likely to become more important as technology evolves throughout the rest of the century.
The Physical Risk Exposure Scores and Financial Impact dataset covers more than 2,000 data centres owned by S&P Global 1200 companies. These assets are particularly sensitive to extreme heat, which will have the highest financial impact by the 2050s, followed by drought and water stress.
Extreme heat can lead to accelerated degradation of HVAC systems, and thus increase capital expenditure. For example, take two hypothetical data centres located on the same block in a city that is exposed to extreme heat. One of them is a small site operated by a local internet service provider, while the other is a state-of-the-art facility operated by a multinational social network company. Periods of extreme heat would increase cooling costs and speed up the deterioration of HVAC systems for both data centres. These costs can be expressed in relative terms for both assets (i.e., the percentage of typical asset value), but the value of each facility is not known, which is why this analysis focuses on the relative impact.
While the absolute costs are likely to vary by location or the size of the asset, the vast majority of data centres owned by S&P Global 1200 companies will face at least some financial impact by the 2050s. In that decade, about one-quarter of these data centres could face financial impact equal to 10% or more of the asset’s value. But that share skyrockets to nearly 89% of data centres by the 2090s.
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Authors: Jennifer Laidlaw, Rick Lord, Matthew MacFarland, Kuntal Singh
Disclosure
The S&P Global Sustainable1 Physical Risk Exposure Scores and Financial Impact dataset defines for each company the financial impact due to changing hazard exposure, absent any adaptation and resilience measures. Financial impact at the company level reflects the weighted average financial impact for all assets linked to the company, weighted by the estimated value of the assets.
To assess the financial impact at the asset level, we use S&P Global Sustainable1 climate physical risk data, which assigns an exposure score for physical climate hazards to each of the more than 2 million corporate assets in the dataset. We assess seven physical climate hazards: extreme heat, water stress, coastal flood, fluvial flood, tropical cyclone, drought and wildfire. The hazard exposure score for an asset is combined with the asset type-specific sensitivity profile to quantify the future financial costs associated with each hazard. These costs can include a range of costs stemming from increased operational expenses to lost revenues due to business interruption through to physical damage and costs to repair assets. These costs are expressed as a percentage of the value of each asset type as an indicator of the financial impact at the asset level.
The assets considered are real assets or physical assets. The asset values are constant and indicate the relative value of different asset types, such as an office compared with an electric power plant. The costs associated with the hazards can, but do not always, reduce the value of a real asset.
These projections are based on the climate scenario known as SSP3-7.0, which is characterised by limited mitigation where total greenhouse gas (GHG) emissions double by 2100 and global average temperatures rise by 2.8 degrees C to 4.6 degrees C by 2100. The S&P Global 1200 is an index that covers the largest companies across North America, Europe, Asia, Australia and Latin America, capturing approximately 70% of global market capitalisation.
S&P Global Sustainable1 does not currently have complete data on all asset holdings of all companies in the S&P Global 1200, and these results could change as asset data coverage expands over time.
