El Niño's extreme heat and water stress: The business interruption risk most data centres are not prepared for

El Niño is driving extreme heat and water stress across Southeast Asia. Ho Chi Minh City and Bangkok already rank among some of the most heat-risk cities in the world, according to a 2026 Oxford University study, as temperatures compound with humidity and dense urban populations across the region.

In Malaysia, heat risk is converging with one of its fastest-growing industries: data centres. The nation is now among the world’s four largest net exporters of AI-related hardware while data centre investments amount to an estimated 18% of gross domestic product, the highest share globally. 

For data centre developers and owners, extreme heat and reduced rainfall strain water supplies and electricity generation, and when those fail, cooling systems follow, leading to business interruption.

This same pressure runs through the digital infrastructure ecosystem including telecommunications networks, semiconductor manufacturers, equipment suppliers, and utilities. Construction and operational phases carry different exposure, each with its own risk and its own response. 

The construction phase: How extreme heat and water stress delay delivery

Heat and water stress can hit a construction site in three ways: 

1. Heat reduces safe working time and labour productivity
   Productivity can fall by up to 57% for every 1°C rise above 28°C, and workers under heat stress conditions are four times more likely to experience heat-related illness. Regulators across Asia are responding: Hong Kong's Labour Department and Singapore's Ministry of Manpower have recently tightened heat stress measures for outdoor work.
   
   
2. Water shortages stall water-dependent activities
   During El Niño, construction sites compete for the same water that other industries and utilities are simultaneously drawing down. Malaysia's government, for instance, is already using cloud seeding to protect critical dams in Penang, citing risk to the state's semiconductor industry as reservoirs come under pressure from El Niño-linked rainfall deficits of 20 to 40% forecast by year end. 
   
   
3. Suppliers are disrupted by extreme weather 
   El Niño-driven heat and water stress at supplier and manufacturing locations can delay shipment of goods. When critical equipment arrives late, installation and commissioning are pushed back — compressing the schedule at the phase when delivery pressure and liquidated damages exposure are highest.

Every lost day pushes handover later, postponing revenue while financing costs run on. A contractor may require an extension of time for weather beyond its control, relieving them of delay penalties, but the owner can still face liquidated damages from their own tenant or offtaker for late delivery. Delay in start-up insurance generally responds only where there is insured physical damage, so a heat-driven stoppage may leave that exposure uninsured.

How Marsh helps data centres manage extreme heat and water stress to avoid project delays and losses

• Our climate risk consultants use our proprietary Construction Lapses Attributable to Weather (CLAW) solution to model rainfall and temperature projections against your project timeline, so that contingencies reflect modelled conditions rather than historical averages. Additionally, Sentrisk can identify where El Niño-driven disruption could delay critical equipment deliveries.
• Our Digital Infrastructure Contract Advisory Group combining former contract attorneys, risk managers, and insurance specialists deliver comprehensive contract review to resolve coverage gaps and secure best-in-class insurance for potential claims. 
• Where delay in start-up insurance does not respond, parametric insurance can pay a pre-agreed amount once a predetermined trigger is met, such as consecutive days above a specified temperature.

The operational phase: How water stress and grid strain cause business interruption

Operational uptime is shaped from the planning and site selection stage, when it’s most cost-effective to model a site against future energy and utility challenges. Once a facility is live, the exposure moves outside the fence. Three dependencies come under pressure together:

1. Heat drives up cooling demand just as water becomes scarce
   Sustained heat raises cooling demand as El Niño-driven drought reduces water availability. Water is also critical for fire suppression and general operations, and regional drought conditions can trigger municipal restrictions as well as drive up the cost of alternative supply.
   
   
2. Equipment supply depends on water and power it may not get
   Semiconductor manufacturers, whose components sit behind critical data centre equipment, face the same water and power constraints. Even once components are made, El Niño can affect delivery. For instance, Panama Canal recently cut daily transits as water levels drop, with some vessels reportedly paying over US$1 million at auction for a slot. This shows that equipment availability and replacement timelines extend well beyond the facility itself.
   
   
3. Rising power demand collides with constrained generation and backup capacity
   Higher ambient temperatures drive up electricity demand as drought cuts hydropower generation, a risk that already played out in 2023 when a regional drought cut Southeast Asia's hydropower output by 9.5% in a single year. Generators respond by leaning on coal and gas, pushing electricity costs up as demand peaks and strain older grid infrastructure. BESS systems carry their own exposure: Sustained heat raises the risk of thermal runaway, so thermal management becomes critical when the grid is already under pressure.

When El Niño-driven disruption stops short of physical damage, conventional business interruption insurance may not respond — and utility or supplier extensions vary by wording, leaving operators exposed to uninsured revenue loss and SLA breach liability.

The risk does not end when El Niño does. When El Niño gives way to La Niña, the risk profile shifts from heat and drought to heavy rainfall and flooding which can affect drainage, substation design, placement decisions, and continuity plans across the entire operation.