Erratic weather is forcing private equity investors to scrutinize a new source of financial risk — whether assets in their portfolios can withstand a changing climate.
For decades, investment models at the world’s largest funds relied on assumptions of a relatively stable climate based on historical data. But frequent record-b
reaking weather events triggered by global warming are creating new threats to earnings, asset valuations and exit outcomes for their portfolio companies.
“It’s more about identifying any of the risks that would cause an investment to fall over or present a big bill halfway through the investment period,” sai
d Chetan Chhatwal, a Los Angeles-based partner at Baringa Partners LLP, which advises more than 5
0 private equity funds on their investments and sold a climate scenario model to BlackRock Inc. for its Aladdin Climate platform. “Anything that prevents that from happening is not box ticking.”
A Bloomberg Green analysis of the latest sustainability reports published by 12 of the largest alternative asset managers show overall mentions
of physical climate risks and related terms nearly doubled from a year before, with Carlyle Group Inc., General Atlantic LP, KKR & Co. and Partners Group AG seeing large increases. Funds tend to identify floods and cyclones as the mo
st immediate risks. Most are now screening their portfolios for vulnerabilities to heat and trea
ting it as a long-term, chronic risk, especially for their combined private equity assets totaling more than $700 billion.
Rich Sorkin, the founder and chief executive officer of analytics firm Jupiter Intelligence Inc., which made more than $10 million in revenue last year and has been used by Carlyle and Permira, said private equity funds are now amo
ng its largest customer base. Sorkin said funds are willing to pay hundreds of thousands of dollars a
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nnually to conduct analysis on “additional insurance costs over time or adaptation investments, the impact on ROI,” plus the right timing for the expenditure.
The cost of natural catastrophes such as hurricanes and wildfires has continued to rise in
recent years, as a combination of climate change, urbanization and inflation mean disasters are g
etting more costly when they hit. Europe is particularly exposed to extreme heat over the next five years, a stress test conducted by Allianz SE found, with pot
ential combined economic losses of $638 billion across France, Italy, Germany and Spain due to declines in fixed capital formation and reduced consumption.
Now, as weather-related losses affect companies globally, and rules under the International Sustainability Standards Board and European Union regulations require more assessments, investors are starting to conduct additional phy
sical risk analysis pre- and post-investment. The clamor for data center investments is proving to be another driver as funds try to safeguard their assets.
“It’s good that private equity is waking up to it, but a lot of money has already been tied up, with no
way to properly measure or gauge the risk,” said Gautam Ramdurai, founder and principal of corporate advisory firm snowbird global.
Private equity has been a significant source of financing for polluting fossil fuel companies and assets, particularly as public market scrutiny and regulatory pressure have led some traditional capital providers to reduce their exposure.
