Extreme heat reshapes investment logic in European stock markets! Cooling, power grid, and other companies may benefit from the "climate dividend"

According to Zhitong Finance APP, even though Europe’s heatwave is finally starting to fade, fund managers say they are still working to assess how climate change will impact their portfolios. Katie Sell, Senior Investment Manager at Pictet Asset Management, said the company has recently been receiving constant calls from clients inquiring about the risks and opportunities brought by extreme heat. Sell stated: “Climate adaptation and resilience are among the most important investment themes of the next decade, but at the same time, they are also among the most difficult to grasp.” US asset management firm Nuveen noted that Europe’s drought will soon begin to impact corporate credit spreads. David Harrison, a fund manager at Rathbones Asset Management, said he is optimistic about companies involved in climate solutions and grid infrastructure construction.

This impact is becoming increasingly clear at the single-company level. Previously, this discussion focused mainly on utility companies, but now it has expanded to industries such as finance, industrials, and healthcare. According to analysis, the number of mentions of extreme heat in recent global corporate filings has reached record highs; the number of references to the Rhine River and its water levels during corporate earnings calls has also reached levels not seen since 2018.

European companies warn of the impact of extreme weather: This quarter, the number of mentions of heatwaves and water shortages during earnings calls has reached the highest level in at least a decade

For investors, the current challenge is to identify which companies face the greatest risks and which might benefit from these changes. So far, the market still regards the historically low water levels of the Rhine River as a weather issue rather than a credit risk issue. However, Nuveen global investment strategist Laura Cooper stated, “The magnitude of this disruption suggests otherwise.”

It is estimated that extreme weather will drive global spending to exceed $20 trillion over the next decade. Here is how different sectors are affected:

Cooling Systems

Analyst Omid Vaziri pointed out that as market spending on cooling, automation, and grid resilience increases, Schneider Electric SE, ABB Ltd, and Siemens AG may benefit. He also noted that Alfa Laval AB and Wartsila Oyj are potential targets for investment in cooling, backup power, and microgrid trends.

Another analyst, Andrew John Stevenson, believes that Munters Group AB, which provides industrial cooling systems, and temperature-controlled logistics specialist Stef, may also benefit. Rathbones Asset Management’s ESG-focused portfolio manager Harrison said, “What you need to invest in are the ‘pick and shovel’ providers within this trend.”

AI demand drives up cooling-related stocks

However, due to the energy demands of AI systems boosting industry valuations, some companies’ valuations in this sector have already reached high levels. Shares of Schneider Electric have soared about 25% this year, pushing its P/E ratio up to 30x, while Munters’ P/E ratio is around 60x.

Industrials

Low water levels are forcing barges on the Rhine River to reduce cargo loads, thereby increasing transportation costs for chemical, steel, and cement companies. According to Stevenson’s analysis, BASF SE has already invested in ultra-shallow draft tankers operated by Oslo-listed shipping company Stolt-Nielsen Ltd. If other companies are also forced to make similar adjustments, Stolt-Nielsen may stand to benefit.

The Rhine River hit a new historic low water level in August

Utilities

Power generation companies that rely on water for cooling or to drive hydroelectric turbines have already sharply reduced output. EnBW Energie Baden-Wuerttemberg AG warned that its profits could take a hit of several million euros as a result. Cooper said: “Companies with diversified generation capacity, alternative logistics channels, or pricing power should be rewarded by the market.”

Agriculture

Farmers may need to rely on science and technology to find long-term solutions to environmental stress. Companies such as Bayer AG, BASF, KWS SAAT SE, and Corteva Inc. are developing products that help protect crop yields under adverse conditions. Sell said Novonesis A/S is also a company worth watching, as it produces an enzyme that promotes deeper root growth in plants.

Retail

Mitchells & Butlers Plc, a UK catering industry giant, is one of many companies to point out that high temperatures have hurt sales. Dunelm, one of the UK’s largest home goods retailers, said high temperatures led to lower foot traffic in its stores. UK retail sales in July fell for the first time since April, partly because consumers avoided shopping trips to escape extreme heat. According to the UK Met Office, England experienced its driest July since records began in 1836, and across the UK, the average July temperature was more than 2°C above normal.

July’s heatwave dragged down apparel sales in the UK

However, there have also been beneficiaries. The bottled water business of Nestlé SA and Carlsberg A/S both said that the warmer weather in Europe has boosted their business.