Climate change is creating new risks for businesses and economies, but also new investment opportunities. Holger Mertens, Managing Director at Amova Asset Management, explores why bond investors may find value in the infrastructure needed to support a more resilient and sustainable economy.
While Europe experienced its hottest summer on record, the effects of climate change were felt far beyond the continent. Rising temperatures and changing weather patterns are no longer merely environmental concerns; they are increasingly becoming material economic and business risks.
The impact was visible across multiple industries. Mining giant Rio Tinto reported a revenue shortfall following disruptions caused by tropical cyclones, which affected both iron ore production and shipping operations.
Across Europe, persistently low water levels on the Rhine disrupted one of the continent’s most important transportation corridors, increasing logistics costs and creating supply chain bottlenecks. Similar challenges emerged globally.
The Panama Canal, for example, continued to face operational constraints due to El Niño-related drought conditions, limiting vessel traffic and affecting international trade flows.
The energy sector was not immune. Romania’s Cernavodă nuclear power plant, which relies on cooling water from the Danube River, faced operational challenges during periods of exceptionally low water levels and elevated temperatures.
Such events highlight the growing vulnerability of critical infrastructure to changing climatic conditions and raise questions about the resilience of existing energy systems.
Wildfires provided another stark reminder of the economic costs of a warming climate. Across Southern Europe, thousands of people were forced to evacuate as fires spread across large areas of Greece, Spain, Portugal and parts of France.
Beyond the immediate human tragedy, the economic consequences were substantial. Agricultural production suffered as crops and livestock were damaged, tourism revenues declined in affected regions, and insurance companies are likely to face billions of euros in claims.
As extreme weather events become more frequent, insurers may increasingly reassess risk pricing, potentially raising premiums for businesses and households alike.
Despite mounting evidence of the economic costs associated with climate change, political momentum behind climate policies has weakened in several regions.
The Trump administration has significantly rolled back initiatives aimed at reducing greenhouse gas emissions, prioritising energy affordability and domestic industrial competitiveness.
Meanwhile, even the European Union, long regarded as the global leader in sustainable regulation, has begun to soften parts of its regulatory agenda amid concerns that excessive compliance requirements could undermine the competitiveness of European companies relative to their global peers.
This changing political backdrop has also been reflected in investment flows. Sustainable equity funds have continued to experience significant outflows, even as overall equity fund flows have remained relatively resilient. Sustainable fixed income strategies have continued to attract capital; however, growth has lagged that of conventional fixed income funds.
This divergence suggests that while investors remain interested in sustainability themes, concerns about performance, regulation and higher interest rates have reduced enthusiasm for sustainable investments, particularly on the equity side.
Where bond investors can find opportunities
Yet the underlying investment need remains as strong as ever. Global electricity demand continues to rise, driven by several powerful structural trends.
Electric vehicle adoption continues to increase, data centres are consuming ever larger amounts of energy to support artificial intelligence and cloud computing, and households are increasingly installing heat pumps as they transition away from fossil fuel-based heating systems.
At the same time, ageing electricity grids require substantial upgrades to accommodate growing renewable energy generation and shifting consumption patterns.
The large-scale power outage in Spain last year served as a reminder that investments in transmission, distribution and grid modernisation remain essential.
Without significant spending on infrastructure, the transition to a more electrified economy may face meaningful constraints.
From a credit perspective, the market’s attention has increasingly focused on hyperscalers and data centre operators, many of which have turned to the bond market to finance substantial capital expenditure programmes.
While these issuers generally retain strong credit profiles, the sheer volume of issuance has created a significant supply overhang. Given the scale of planned investment in AI infrastructure, spreads in parts of the technology sector may remain under pressure, particularly if leverage increases faster than cash flow generation.
Instead, we see more compelling opportunities among the enablers of the energy transition, particularly regulated utilities and infrastructure operators.
These companies stand at the centre of the investment cycle required to modernise energy generation, transmission and distribution networks.
Their business models are generally characterised by predictable cash flows, supportive regulatory frameworks and relatively stable credit profiles.
Green and other labelled bonds remain an attractive way to gain exposure to these themes. Unlike conventional bonds, labelled instruments provide investors with clearly defined use-of-proceeds frameworks and require issuers to report regularly on the deployment of capital and the environmental outcomes achieved.
This enhanced transparency can help investors better assess the impact of their investments while reducing concerns around greenwashing.
We believe labelled bonds are well positioned to benefit from these trends. In addition to their attractive exposure to long-term infrastructure investment themes, they may benefit from investors seeking to diversify away from the substantial supply coming from large technology issuers.
Performance within parts of the hyperscaler universe has recently been lacklustre, increasing the appeal of sectors where proceeds are directed towards tangible infrastructure projects rather than corporate expansion.
Ultimately, the most attractive opportunities may not lie in financing energy consumption, but rather in financing the infrastructure that enables a more sustainable economy.
Investments in power generation, electricity transmission, grid resilience and energy efficiency are likely to remain priorities for governments, regulators and corporations alike.
For bond investors, this creates a compelling long-term opportunity to combine stable credit fundamentals with exposure to one of the defining structural investment themes of the coming decades.
Main images: climate change, kelly-sikkema-_whs7FPfkwQ-unsplash
