How extreme temperatures may affect Chinese companies
Last year, China suffered its most intense heatwave, with nearly one billion people experiencing temperatures exceeding 35°C. This year, the China Meteorological Administration has warned that more extreme weather conditions may occur. With climate change accelerating, extreme and abnormal weather patterns are becoming more frequent, raising questions for investors around potential company and sector impacts.
Which sectors may be most at risk to heatwaves?
According to the latest report from the Intergovernmental Panel on Climate Change (IPCC), the average global surface temperature for 2011–2020 was 1.1°C above 1850–1900 levels. And as global temperatures continue to rise, further changes in weather and climate extremes are projected, resulting in escalating damages.
For China specifically, more than one quarter of the country is expected to face medium-to-high or high risk from physical climate impacts under a 2°C warming scenario.
While overall exposure to physical climate risk is anticipated to increase for companies operating in China, sector-level impacts are not projected to be evenly distributed. To assess this, we took a hypothetical portfolio of companies, based on the MSCI China Index (as of March 2023), and determined variations in physical climate risk using MSCI’s Climate Value-at-Risk (VaR) model.
We found that extreme heat comprised 49% of the total potential loss from all physical climate risks in the hypothetical portfolio, the second largest hazard type following coastal flooding. The exhibit presents the potential losses from extreme heat for each Global Industry Classification Standard (GICS®) sector on a 1.5°C warming trajectory.
Potential losses from extreme heat varied considerably by sector
For the hypothetical portfolio, the energy and utilities sectors, with a combined 5% weighting, contributed 33% of the weighted extreme heat VaR, partly due to infrastructure disruptions, increased cooling costs and reduced productivity. By contrast, the consumer discretionary and financials sectors, with a combined weighting of 44%, contributed a much lower potential loss percentage (22%).
Not only does the extent of vulnerability differ across sectors, but the relative impacts each sector experiences are shown to change under different warming scenarios. Financials, telecommunication services and real estate, which may not be largely affected under an orderly 1.5°C transition, become some of the most sensitive to global warming with projected market value losses increasing ten-fold under a 5°C warming scenario compared to a 1.5°C warming scenario.
Where might a heatwave hit the hardest?
Another factor at play in economic losses due to extreme heat is location. To look at this, we retrieved the asset-level assessments of extreme-heat VaR and then aggregated them to assess worst-case potential losses (i.e., a 5°C warming scenario).
Potential losses from extreme heat are projected to vary by location
Under the 5°C warming scenario, we found companies domiciled in Beijing, Shanghai, Shenzhen and inland provinces such as Sichuan Province and Hebei Province are exposed to higher potential losses (dark red regions in the above exhibit). Within these areas, the assets located in the same single grid (smaller than 10,000km2) may face a combined potential loss over USD 2 billion by 2100.
-- Contact us at [email protected]
-
Disappointed, Hong Kong migrants return from U.K. Mark O'Neill
Unable to find a satisfactory job and integrate easily into British society, some Hong Kong migrants have returned home – but remain discreet for fear of losing face with their friends and former
-
Visualisation is the best way for communication Dr. Winnie Tang
In recent years, environmental expectations have become increasingly high, and urban development is prone to disputes. The international tournament held at the Fanling Golf Course in March reminded
-
What drives you? Brian YS Wong
“What drives you?” All eyes were on me – the instructor at the front of the class. Before me were thirty eager high-schoolers, ambitious and aspiring, bushy-eyed and cherubic yet by no means naïve.
-
Integration of GIS and BIM can drive development of smart city Dr. Winnie Tang
The China Association for Geospatial Industry and Sciences (“the CAGIS”) released the Top Ten Highlights of China's Geographic Information Industry in 2023, which provides much inspiration. The
-
Equip young people for the future Dr. Winnie Tang
In late February, the inaugural flight of an air taxi from Shenzhen Shekou Cruise Homeport to Zhuhai Jiuzhou Port took only 20 minutes with an estimated one-way ticket price of 200 to 300 yuan per
-
黃家正:從不離棄香港 本地薑音樂節正式回歸
-
CINDY CHAO 20周年系列頌揚生命的律動
-
WATCHES & WONDERS 2024︰PANERAI賽船情緣
-
WATCHES & WONDERS 2024︰HUBLOT科技精髓
-
WATCHES & WONDERS 2024︰TUDOR金光四射
-
WATCHES & WONDERS 2024︰ZENITH追本溯源
-
WATCHES & WONDERS 2024︰GRAND SEIKO東灜景色
-
WATCHES & WONDERS 2024︰JAEGER-LECOULTRE大師之作
-
WATCHES & WONDERS 2024︰TAG HEUER尖端破格
-
WATCHES & WONDERS 2024︰ROGER DUBUIS 桀驁登場