In an uncertain world, longer-term investors face complex risks that can shape outcomes throughout the asset management lifecycle. One such risk is extreme weather.
A recent Marsh survey found that 75% of businesses have experienced losses or disruptions to physical assets, operations, and people due to extreme weather, with supply chains, customers, and critical infrastructure all affected. This has a direct impact on investors, especially since extreme weather can impact insurance premiums and affect the long-term value of assets.
With fixed (re)financing calendars, sudden changes in insurance terms may result in lender covenant breaches. The question becomes: How can longer-term investors maintain or enhance their exit potential from assets exposed to increasingly severe weather events? Addressing this challenge requires investors to take a proactive approach to extreme weather across the lifecycle of an asset or portfolio, which can yield better outcomes and improve valuations upon exit.
1. Pre-acquisition: know what you are buying from a climate risk perspective
Extreme weather is increasingly being considered by investment committees, as discussed in a Marsh podcast on sustainable investment strategies. One less understood dimension is how changing extreme weather will affect property damage, business downtime, and insurance coverage over time.
Conducting a screening for current and future extreme weather risk of a target’s asset portfolio enables investors to better understand the baseline level of risk and how it may change over the hold period. This screening provides a view of where the highest risk sites are from both a property damage and business downtime perspective and provides deeper insights into potential ‘insurability’ implications. Once exposed sites are identified, the current more favorable insurance market is an opportune time to use insurance premium savings to invest in resilience, strengthening the asset’s position ahead of the next more challenging insurance cycle.
2. Portfolio management: improve the risk profile of your acquisition, ideally early to maximise benefits
When managing risk across a portfolio, individual company managers want a view of risk at their fingertips. Many of our clients are leveraging AI-powered tools, like Marsh’s Sentrisk, to tailor the way they manage a whole spectrum of risks, such as cyber threats, geopolitical challenges and, of course, extreme weather. For example, having a forward-looking view of risk, as well as receiving location-specific live alerts, can support resource deployment to minimise businesses downtime in the event of a disruption.
For asset-heavy investments, like commercial real estate, it is likely that there will be an ongoing need to ‘harden’ assets against extreme weather events over time. Often, the first best step is to enrich site-based data quality through site surveys to better understand a sites’ inherent resilience and accurately account for it in risk pricing. We have seen from experience that when clients have these insights they are able to achieve better placement outcomes as well as provide a forward-looking view on the cost-benefit of resilience measures. Reducing the cost of risk can take time, making early action critical to maximise the benefits over the hold period.
While asset hardening at your own site is part of the puzzle, it may not be sufficient on its own to reduce all of the risk. Extreme weather events may impact shared systems, like energy and drainage infrastructure, leading to wider operational disruption. Our team helps companies quantify and reduce the risk of business downtime driven by offsite impacts, starting with mapping critical operations and supply chains to identify dependencies in high-risk areas. From there, some companies may need to update or pressure-test their business continuity management plans to determine whether they are adequately prepared for the impacts of extreme weather.
Evaluating the return on investment of different risk management options can help investors prioritise quick wins. Insurance can also be a lever to recognise existing resilience measures. For example, sustainability-linked insurance products can reward portfolio companies based on performance against adaptation-linked indicators. This work can be done at the company level or across the entire portfolio. Investors can also take cross-portfolio action, such as portfolio rebalancing based on industry- and geography-related extreme weather exposures to reduce risk. Ultimately, these resilience-building actions should be translated into clearer investment committee decisions and improved valuation at exit.
3. Exit: capture the financial benefits of asset or portfolio resilience at sale
When the time comes to sell the asset, investors can build a case for resilience improvements to be reflected in the asset value. A compelling narrative as part of marketing materials can involve additional site surveys to accurately quantify the benefits of investments, maintaining insurance-related ‘bankability’ needed for exit.
Portfolio value creation has always been a priority for investors. When it comes to extreme weather, a proactive approach is required. This includes a defensive play, maintaining asset ‘insurability’ in the long run, as well as an offensive play — collaborating with portfolio companies to manage risks and build resilience to create long-run value.
Turning resilience into a value-driver
Extreme weather is becoming part of the investment case. For longer-term investors, building resilience in their assets is an important part of the value-creation strategy. Those that act early to understand, manage, and communicate extreme weather risk have a better chance to protect their asset and increase its value ahead of an exit.
