How investors are approaching Europe’s record-breaking heat wave

LONDON – Many Western European countries have spent this week facing record-breaking heat waves, with red alerts issued in the UK, France, Germany, Switzerland and Italy warning of “dangers to health even for healthy people.”

Temperatures soared above 40 degrees Celsius (104 degrees Fahrenheit) in various regional towns and cities, with “tropical nights” providing little respite from the above-average June heat. Old buildings and infrastructure, limited weather detection and less adaptation to such high conditions mean that Europeans are less equipped to deal with such temperatures than other parts of the world.

Amid warnings that climate change means hotter temperatures will become the norm, some investors are rethinking how to prepare their portfolios for expected societal changes and a future of hot summers.

Stephanie Niven, portfolio manager of Global Sustainable Equity Strategy at Ninety One, told CNBC on the phone Friday that her team has taken the view that the increase in extreme weather conditions in Europe creates an opportunity for growth in the investment structure.

The managers of the Global Sustainable Equity Fund are looking for companies with products and solutions that “depend on helping people respond and build resilience in challenging times,” he said. Its investments include companies focused on decarbonization, climate change, water and waste management, financial inclusion, and health care impact.

One of the fund’s broad areas of focus is insurance, said Niven, named after the broker and insurer Aon and Canadian insurance Strong Finance as two participating areas in this field.

He told CNBC that the Ninety One team is most interested in companies that “have policies that help those fighting climate change and allow the world to be more responsive.”

“We see insurance providers [creating] an up-to-date climate model in their risk plans,” he said.

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

“This may be a shock that disrupts this cycle that has been soft for many years,” he said. “A strong El Niño can have an interesting effect on the insurance cycle – fewer but more powerful storms and an increased chance of large losses, which can shock the insurance cycle more. A very large event can mean a huge opportunity for the industry.”

“We like companies that lean into the security gap and enable risk matching and coverage,” he added.

On the insurance side, Niven’s fund is looking for firms that can offer climate change, such as those listed in New York. Trane Technologieswhich produces cooling systems and refrigerators. Financial inclusion is another focus of the fund, Niven says its management team is looking for companies that can help with “financial resilience that brings young people and communities to the financial infrastructure to keep businesses alive.”

Michael Field, chief equity strategist at Morningstar, agreed that there are companies poised to benefit from a hot summer on the continent.

“Certainly, industrial companies like it Johnson Controls again Siemens they will benefit greatly,” he said in an email on Friday. “Both of these companies operate in the HVAC space, primarily producing commercial heat pumps. Modern pumps can double as cooling devices, which can provide an effective solution to the sweltering summer climate.”

Field added that with extreme weather and the associated damaging effects, especially in developing countries, moving away from fossil fuels and pushing towards clean energy could benefit utility firms.

“The words are the same Vestas again Iberdrolaexposure to clean wind energy would be direct beneficiaries,” he said. “Similarly, the move to upgrade the grid to accommodate renewable energy sources would benefit companies such as National Grid in the UK Oil majors like A shell again Totalwith greater exposure to solar and biofuels projects, they can also benefit.”

Matthew Donen, director of research at Morningstar, added that the current heat wave has put more pressure on Europe’s electricity grid, which has seen electricity prices rise amid growing demand for cooling.

“The aging electricity infrastructure could not cope with this, as many plants were forced to reduce production due to increased demand,” he said in an email. “This highlights the long-term need for grid development. ABB, Schneider Electric again Siemens are the main beneficiaries of this body of infrastructure investment, providing switchgear, transformers, grid automation and energy management equipment for utilities that need to strengthen and expand the old electrical infrastructure.”

In a note on Friday, UBS strategists said the heatwave, which has dropped temperatures up to 18 degrees Celsius above normal levels, will have a direct impact on the economy – opening up investment opportunities as the population and authorities scramble to adapt.

“Western Europe is facing a heat problem that has disrupted electricity supply, closed schools, and disrupted transportation and culture,” they said.

“France’s nuclear power plants are reducing production by about 7% of total demand as high temperatures limit access to cooling water, while rail networks, schools, and working hours are disrupted in several countries. This episode may add to the ongoing political pressure behind decarbonization, climate adaptation, electrification, and energy efficiency investments.”

The UBS team also noted that the continent’s decarbonisation strategy and energy policy are “among global ambitions.”

“While we are neutral on Eurozone equities in general, we believe that decarbonization is one of the country’s trends that investors should pay attention to,” they said.