Even as the European heatwave finally begins to subside, fund managers say they are still grappling with how to assess the impact of climate change on their portfolios. Katie Ser, a senior investment manager at Pictet Asset Management, noted that the firm has recently fielded a steady stream of client calls inquiring about the risks and opportunities tied to extreme heat. "Climate adaptation and resilience is one of the most important investment themes of the next decade, but also one of the hardest to navigate," Ser remarked.

Meanwhile, U.S. asset manager Nuveen warns that Europe's drought will soon start to influence corporate credit spreads. David Harrison, a fund manager at Rathbones Asset Management, says he is bullish on companies involved in climate solutions and power grid infrastructure. The impact is becoming increasingly visible at the individual company level. While the conversation was once dominated by utilities, it has now broadened to encompass financials, industrials, and healthcare.

According to analysis, mentions of extreme heat in corporate filings globally have hit an all-time high, while references to the Rhine River and its water levels on earnings calls have reached levels not seen since 2018. European companies are warning of extreme weather effects, with this quarter's earnings calls featuring the highest number of mentions of heatwaves and water shortages in at least a decade. For investors, the challenge now lies in identifying which companies face the greatest exposure and which may stand to benefit. So far, the market has treated the Rhine's record-low water levels as a weather event rather than a credit risk, but Laura Cooper, a global investment strategist at Nuveen, argues that "the scale of this disruption suggests otherwise."

Estimates indicate that extreme weather will drive more than $20 trillion in global spending over the next decade. Here is a breakdown of the impact across sectors.

Cooling systems

Analyst Omid Vaziri points out that as spending on cooling, automation, and grid resilience increases, Schneider Electric SE, ABB Ltd, and Siemens AG could benefit. He also notes that Alfa Laval AB and Wartsila Oyj could serve as vehicles for investing in cooling, backup power, and microgrid trends. Another analyst, Andrew John Stevenson, believes Munters Group AB, which provides industrial cooling systems, and Stef, a specialist in temperature-controlled logistics, may also gain. Harrison, the ESG-focused portfolio manager at Rathbones Asset Management, says, "You need to invest in the 'picks and shovels' of this trend."

AI demand has driven cooling-related stocks higher, but valuations in some parts of the sector are already stretched. Schneider Electric shares have surged about 25% year-to-date, pushing its price-to-earnings ratio to 30 times, while Munters trades at roughly 60 times earnings.

Industry

Low water levels have forced barges on the Rhine to reduce cargo loads, driving up transport costs for chemical, steel, and cement companies. According to analyst Stevenson, BASF SE has already invested in ultra-shallow-draft tankers operated by Oslo-listed shipping firm Stolt-Nielsen Ltd. If other companies are compelled to make similar adjustments, Stolt-Nielsen could benefit. The Rhine hit a new record-low water level in August.

Utilities

Power generators that rely on water for cooling or to drive hydroelectric turbines have already slashed output. EnBW Energie Baden-Wuerttemberg AG has warned that its profits could take a hit of millions of euros as a result. Cooper says, "Companies with diversified generation capacity, alternative logistics channels, or pricing power should be rewarded by the market."

Agriculture

Farmers may need to lean on science and technology to find long-term solutions to environmental stress. Bayer AG, BASF, KWS SAAT SE, and Corteva Inc. are all developing products designed to help crops maintain yields under harsh conditions. Ser also highlights Novonesis A/S, a company producing an enzyme that promotes deeper root growth in plants.

Retail

UK pub giant Mitchells & Butlers Plc is among the many companies pointing to heat as a drag on sales, while Dunelm, one of Britain's largest home goods retailers, says high temperatures have reduced footfall in its stores. UK retail sales fell in July for the first time since April, partly due to consumers avoiding shopping trips to escape the extreme heat. Met Office data shows England experienced its driest July since records began in 1836, while average temperatures across the UK were more than 2 degrees Celsius above normal for the month.

However, there are winners too. Nestlé SA's water business and Carlsberg A/S have both said that warmer weather across Europe has boosted their operations.