Patrick O’Connell: When natural disasters occur, the impact on humanity can be devastating. There’s also an impact on financial markets. When these perils do hit, there can be a negative impact on economies, infrastructure and companies, and by extension, a negative implication to investors.
Given the magnitude of these perils, we’ve partnered with the Columbia Climate School to develop a Natural Hazards Index. This indicator brings information across 14 different perils. In our most recent edition, we’ve built out a model that forecasts for the four most important perils—wildfires, flooding, tornadoes and hurricanes—where those perils will change over time.
We look at both the magnitude and the location. Having this information at the county level for all 3,000+ counties in the US helps investors think about what’s the risk or opportunity for their factory, for their power plant, if it’s in one county or another in different parts of the country.
We believe this geospatial data can unlock insights. Ian, from an equity point of view, how do you incorporate this into your analysis?
Ian McNaugher: Patrick, a tool like this is a game changer from my standpoint, covering regulated utilities in the United States. A utility that’s exposed to hurricanes often has provisions that help them recover excess costs, and over time, actually often have some of the most resilient grids in the United States. Whereas a wildfire that’s ignited by a downed wire can lead to a company liability, and so having a tool that lets one predict how this risk is shifting is very important.
The other thing about it is it’s so granular. People don’t appreciate, but Texas has over five different publicly traded utilities. So having something down to the zip code is essential.
Jayme Lisiewski: I think one of the more interesting aspects is, looking back historically at the data, you see that where these situations hit, whether it’s a flood, whether it’s a storm, whether it’s a power outage, and you’ve seen operations disrupted from companies.
I think the biggest opportunity when you engage with companies is seeing that, you know, the rebuild afterwards, whether it’s rebuilding the power infrastructure, the power cables, the power plants themselves. It’s also the engineering and construction firms that respond to these disasters as they take place.
I think that’s an underappreciated aspect that the market doesn’t look at enough. And I think that with the Index predicting where these storms are going to take place, you could see where companies are best positioned to benefit from these opportunities.
IM: Jayme, it can be an opportunity for utilities as well. Utilities in the US are very state specific, and it’s very important for investors to understand what is the wildfire mitigation plan for that utility in that state, but also where is the state in terms of the laws and how that’s evolving in terms of protecting the utility, providing visibility into what wildfire mitigation investments are.
But at the end of the day, we want the utilities we invest in to be doing what they can around tree trimming, undergrounding, grid hardening to make them a more resilient business. And so we see those opportunities across the investment landscape too.
PO: Jayme, from your point of view, this very geospatial data point, has that been helpful when you’ve engaged with companies? Is that something that’s new?
JL: So, this is something I don’t hear companies talking about, in engaging with several companies recently. So, I think one of the more interesting aspects of this is investors always look at historical data. They’re not looking at future data. They’re not seeing where the change in climate activity might take place, where it might impact operations that were previously safe.
So, I think having that consistent set of data that predicts future events is highly valuable for an equity investor perspective. I think that that is something, that data, I could provide to my companies that gives them a thought that they might not have looked at previously or might not have factored that into their financial analysis.
PO: I think our conversation has made it abundantly clear that natural hazards isn’t something that we can just segment into an environmental bucket. We think that well-researched tools like the Natural Hazard Index can bring out geospatial data points that can help us on both the risk and the opportunity side when we think about investing.