How investors are approaching Europe’s record-breaking heatwave

LONDON — Multiple Western European countries have spent this week grappling with record-smashing heatwaves, with red alerts issued in the U.K., France, Germany, Switzerland and Italy that warn of “a risk to life for even the healthy population.”

Temperatures soared well above 40 degrees Celsius (104 degrees Fahrenheit) in various regional towns and cities, with “tropical nights” offering little respite from the well-above-average June heat. Old buildings and infrastructure, limited uptake of air conditioning and little acclimatization to those highs mean European populations are less equipped to cope with such temperatures than other parts of the world.  

Amid warnings that climate change means scorching temperatures are set to become the norm, some investors are rethinking how to prepare their portfolios for the societal changes anticipated alongside a future of sweltering summers.

Stephanie Niven, co-portfolio manager of the Global Sustainable Equity strategy at Ninety One, told CNBC on a call on Friday that her team took the view that the rise of intense weather conditions in Europe was creating a structural growth opportunity for investment.

The Global Sustainable Equity Fund’s management seeks out companies that have products and solutions that “lean into helping people respond and build resilience in a challenging time,” she said. Its investments include companies focused on decarbonization, climate adaptation, water and pollution management, financial inclusion, and healthcare impact.

One of the broad areas the fund is focused on is insurance, Niven said, naming broker and reinsurer Aon and Canadian insurer Intact Financial as two of its holdings in the sector.

She told CNBC that Ninety One’s team is particularly interested in firms “with policies that help those struggling with climate change and allowing the world to become more responsive.”

“We’re seeing insurers [creating] more up-to-date climate modeling in their risk systems,” she said.

An anticipated El Niño event, expected to occur later this year, could also disrupt weather norms and shake up the insurance industry in a way that investors should watch, Niven added.

“This could be the shock that disrupts what’s been a soft cycle for a number of years,” she said. “A stronger El Niño could have quite an interesting impact on the insurance cycle – fewer but more powerful hurricanes and an increased likelihood of huge loss events, which would be quite a shock to the insurance cycle. A very large event could mean a large opportunity in the sector.”

“We like companies that lean into the protection gap and enable the matching of risk and coverage,” she added.

Alongside insurance, Niven’s fund looks for firms that can offer physical climate adaptations, such as New York-listed Trane Technologies, which manufactures cooling and refrigeration systems. Financial inclusion is another area the fund is focused on, with Niven saying its management team looks for companies that can assist with “financial resiliency that brings new people and communities into financial infrastructure to keep businesses alive.”

Michael Field, chief equity strategist at Morningstar, agreed that there were companies poised to benefit from hotter summers on the continent.

“Certainly, industrial firms like Johnson Controls and Siemens would be huge beneficiaries,” he said in an email on Friday. “Both firms operate in the HVAC space, specifically the manufacture of commercial heat pumps. Modern pumps can double as cooling devices, which could provide an effective solution in more intense summer weather.”

Field added that with more intense weather and the associated damaging effects, particularly on emerging countries, the move away from fossil fuels and the push into cleaner energy could benefit utility firms.

“Names like Vestas and Iberdrola, with exposure to cleaner wind energy could be direct beneficiaries,” he said. “Similarly, the move to upgrade the grid to deal with renewable energy sources could benefit companies like National Grid in the U.K. Oil majors like Shell and Total, with large exposure to solar projects and biofuels, could also benefit.” 

Matthew Donen, Morningstar’s director of equity research, added that the current heat wave has placed additional pressure on Europe’s electricity grid, which has seen spot power prices rise amid surging cooling demand.

“Aging electrical infrastructure has been unable to cope, with several plants forced to reduce output due to increased demand,” he said via email. “This highlights the long-term need for grid modernisation. ABB, Schneider Electric and Siemens are key beneficiaries of this structural investment theme, providing the switchgear, transformers, grid automation and power management equipment that utilities need to strengthen and expand aging electrical infrastructure.”

In a note on Friday, UBS strategists said the heatwave, which has pushed temperatures to as much as 18 degrees Celsius above normal levels, will have direct economic consequences – presenting investment opportunities as populations and authorities race to adapt.

“Western Europe is in the grip of a heatwave that has disrupted power supplies, closed schools, and affected transport and cultural landmarks,” they said.

“French nuclear power plants cut output by around 7% of total demand as high temperatures limited access to cooling water, while rail networks, schools, and working hours were disrupted across several countries. The episode could add further political momentum behind decarbonization, climate adaptation, electrification, and energy-efficiency investment.”

UBS’s team also noted that the continent’s decarbonization strategy and energy policy “are among the most ambitious globally.”

“While we are Neutral on Eurozone equities overall, we believe decarbonization is just one of several secular trends that investors should be paying attention to,” they said.