This summer, both the men’s and women’s editions of the Tour de France have been remarkable, but there was a lurking subplot. Like a relentless peloton chasing down a lone breakaway, the heatwave in Europe was following the route of the Tour itself.
Stages were being cut short, including the final stage of the men’s race into Paris, with emergency services pulled away to tend to wildfires in the Gironde region.
At the women’s stage on Mont Ventoux, the route was shortened and spectators were barred from parts of the mountain forests deemed too risky in the heat.
Two editions of one of the world’s most-watched sporting events, redrawn by fire.
The Tour has been the latest reminder of how abstract physical risk is becoming more visible in the mainstream, with nature as a transmission vector. What once felt like distant news from Australia and North America is now closer to home for many northern Europeans.
Over 530,000 hectares have burned in the EU and UK, as far north as the Scottish Cairngorms. Wildfire is one of the fastest-growing natural-catastrophe perils (around 10 percent of insured losses) and insurers are increasingly transferring exposure to capital markets, where wildfire-linked catastrophe bond issuance has already topped $5 billion this year.
Beyond cycling, cheese has emerged as an unlikely emblem of financial risk and a more direct illustration of market impacts.
Parmigiano Reggiano, used as loan collateral for farmers, is coming under pressure as rising temperatures impact both production (pasture and cows) and storage (warehouse cooling) – impacting asset values directly.
This example mirrors nature’s characteristics in the context of portfolio exposure.
Nature is place-based and cannot be netted across a portfolio. Parmesan is a Protected Designation of Origin under EU Law, limiting production and processing to a specific area. To produce it elsewhere would be to change the nature of the asset itself.
Ecosystems take a long time to recover or show the impact of acute or cumulative pressures. Parmesan can take 36 months to mature, introducing a significant time lag between the effect of heat on production and value of cheese as collateral. Upstream causes are separated by years from the downstream impact on balance sheets.
Water loss
While extreme heat is the pressure, nature is not just a proxy for physical climate risk. There are other drivers at play, including how land is used and managed.
The Landes forest in the Gironde region, for example, grows on former wetland areas drained in the 19th century. Water is a key component of nature and over 85 percent of global wetland areas have been lost. The changed ecology and hydrology of ecosystems has resulted in much drier habitats which are less resilient to today’s extreme heat and drought.
Acute and systemic water loss is driving far-reaching business disruption. European grain farming has seen revenue losses of around €2 billion so far. Low water levels in European inland shipping routes are causing supply disruptions, with cargo volume restrictions limiting input supplies to sectors including car manufacturing, chemicals, and steel production. Nuclear reactor shutdowns have happened in France, Hungary and Romania, with availability of cool water a key factor.
Production, energy and supply chain impacts aggregate in downstream prices for businesses and consumers, and total economic impacts of the drought in Europe are expected to be way above €50 billion.
How new business and supply chains are planned, or old ones adapted, is a pressing question and one that is playing out in the sustainability debate of AI data centres. Many are already in water-stressed areas and compete with existing municipal supplies, research suggests. This is putting pressure on their acceptability by the public, with cross-party opinions affecting permitting in one of the largest growth sectors in recent years.
An overlooked variable
The temptation is to file all this as a climate story, but that would be incomplete.
What changed the route of the tour was the burning forests, grasslands and heathlands, influenced by their management. What affected the Parmesan was the heat stressed cows, the yields of the pasture, as much as the warehouses. What has affected energy, manufacturing and AI is water availability.
This is nature asserting itself as a financial variable – one that has traditionally been overlooked, mispriced or misfiled. It is not a climate or a nature story; it is both, influenced by decades-old decisions around how we manage our environment.
For investors, the important thing is how material risks are being identified and priced, and the opportunities this presents.
Those who recognise climate and nature as part of the same risk system – and that attributing financial risk to either in isolation will understate true exposure – will be better placed to identify exposed assets, engage companies on credible transition planning, and build resilient portfolios.
This reframing changes what good practice looks like. The architecture built for climate risk transfers well to nature, but the tools will need to be modified. Nature-related dependencies, impacts, risks and opportunities need assessing at each point in the value chain, not netted across a portfolio.
This will mean working with qualitative, spatial and context-specific information, and asking different questions about assets and companies, where they operate and the timelines over which change may happen.
Tomorrow, cycling’s attention will turn to the Vuelta a España and Manchego. And while changing the route of a cycle race is unlikely to become a case study of financial transmission risk, it is a reminder of how risk plays out in a complex system – often through channels that appear cultural, local or anecdotal before they become financial.
Investors, like sprinters in the grand tours, who work with complexity and whose teams create opportunities, will find themselves at the front when the bunch gets nervous and starts to panic.
Ben Allen is senior nature and environment lead at the Principles for Responsible Investment.
