Private Equity Turns to Heat Detectives as Climate Risks Intensify

Erratic weather is forcing private equity investors to scrutinize a new source of financial risk — whether assets in their portfolios can withstand a changing climate.

For decades, investment models at the world’s largest funds relied on assumptions of a relatively stable climate based on historical data. But frequent record-breaking weather events triggered by global warming are creating new threats to earnings, asset valuations and exit outcomes for their portfolio companies.

“It’s more about identifying any of the risks that would cause an investment to fall over or present a big bill halfway through the investment period,” said Chetan Chhatwal, a Los Angeles-based partner at Baringa Partners LLP, which advises more than 50 private equity funds on their investments and sold a climate scenario model to BlackRock Inc. for its Aladdin Climate platform. “Anything that prevents that from happening is not box ticking.”

Read more: Banks’ Exposure to Heat-Related Losses Faces Scrutiny in EU

A Bloomberg Green analysis of the latest sustainability reports published by 12 of the largest alternative asset managers show overall mentions of physical climate risks and related terms nearly doubled from a year before, with Carlyle Group Inc., General Atlantic LP, KKR & Co. and Partners Group AG seeing large increases. Funds tend to identify floods and cyclones as the most immediate risks. Most are now screening their portfolios for vulnerabilities to heat and treating it as a long-term, chronic risk, especially for their combined private equity assets totaling more than $700 billion.

Rich Sorkin, the founder and chief executive officer of analytics firm Jupiter Intelligence Inc., which made more than $10 million in revenue last year and has been used by Carlyle and Permira, said private equity funds are now among its largest customer base. Sorkin said funds are willing to pay hundreds of thousands of dollars annually to conduct analysis on “additional insurance costs over time or adaptation investments, the impact on ROI,” plus the right timing for the expenditure.

The cost of natural catastrophes such as hurricanes and wildfires has continued to rise in recent years, as a combination of climate change, urbanization and inflation mean disasters are getting more costly when they hit. Europe is particularly exposed to extreme heat over the next five years, a stress test conducted by Allianz SE found, with potential combined economic losses of $638 billion across France, Italy, Germany and Spain due to declines in fixed capital formation and reduced consumption.

Now, as weather-related losses affect companies globally, and rules under the International Sustainability Standards Board and European Union regulations require more assessments, investors are starting to conduct additional physical risk analysis pre- and post-investment. The clamor for data center investments is proving to be another driver as funds try to safeguard their assets.

“It’s good that private equity is waking up to it, but a lot of money has already been tied up, with no way to properly measure or gauge the risk,” said Gautam Ramdurai, founder and principal of corporate advisory firm snowbird global.

Private equity has been a significant source of financing for polluting fossil fuel companies and assets, particularly as public market scrutiny and regulatory pressure have led some traditional capital providers to reduce their exposure.

With the warming impact of greenhouse gas emissions increasingly felt — including in recent heat waves across Europe and parts of the US — some of the leading investors have started rolling out portfolio-wide risk assessment tools. Carlyle recently developed a risk framework that captures the insurance implications of weather events for asset values, and many funds work with external tool providers for a range of scenarios, scores and outputs, according to their sustainability reports.

Of the 12 private equity firms studied by Bloomberg, Partners Group was among the few that identified heatwaves as an “acute risk” alongside hurricanes, wildfires and floods in its latest sustainability report, recognizing it could result in fresh costs for cooling needs for portfolio companies.

Sweden-based EQT AB, one of the largest private markets firms in Europe that manages EUR 270 billion ($309 billion), has gathered data on more than 23,000 infrastructure assets in its portfolio using third-party analytics to identify climate risks since 2024. In an assessment during due diligence of a South Korean waste management company, exposure to extreme snowfall and typhoons led to extra cash being set aside for improved roofs.

Zoe Haseman, the company’s head of sustainability for infrastructure, said assessments help to “understand what we are actually buying into and what does this mean for our investment in terms of planning for future operating and capital expenditure, insurability costs.” Extreme heat, rainfall and drought are the most material risks across EQT’s funds by 2050 and the southeast US, the Mediterranean and Southeast Asia are the most vulnerable regions.

Brookfield Asset Management in its report noted that its “air cooling systems and backup generators” were prepared for changing climate conditions that could affect its healthcare and senior living businesses. The asset manager also said it had considered the risk of extreme heat on staff in portfolio companies, including the imposition of restrictions on outdoor work during peak temperature hours.

The advent of artificial intelligence has boosted data gathering that will help Temasek International integrate physical risk scenarios into economic models, according to Franziska Zimmermann, managing director for sustainability. “For example, if a heat wave hits, are the consumers actually demanding more or less,” she said at a recent briefing in Singapore. “What happens to inflation? Is the capacity of people purchasing certain products still there?”

Parent company Temasek Holdings Pte., which has a net portfolio value of S$518 billion ($401 billion), is stress-testing for physical risks over a 20-year horizon, and is now using a baseline climate scenario of 2.4C of warming by 2100. It has also engaged insurance companies on pricing some policies differently for companies that take weather-protection measures.

As the need for physical risk analysis accelerates across industries, private equity, venture capital and asset owners have also been looking to tap the investment class.

The climate forecasting and risk assessment industry — which includes anywhere between 150 to 400 environmental analytics, catastrophe modeling and hazard warning firms – could double by 2030 to about $13 billion in value, according to the Boston Consulting Group. It expects the market to grow at about 15% compounded annually, making it one of the most attractive climate adaptation investments.

BCG says the most investable sub-sector for private equity is hazard warning systems, as it’s a mature market with stable cash flows. The boom could also “propel climate-related insurance” and specialized underwriting thanks to increased data availability and analysis, said Partner Daniel Oehling.

Meanwhile, venture capital spent $245 million in the first quarter of 2026 on climate monitoring technologies such as satellites, according to deal data compiled by BloombergNEF. That puts the first-half total on track to be the best since at least 2022, the data shows.

Resilience AI, which provides 30-minute, hyperlocal hazard scans of infrastructure to companies, is looking to raise between $1 million and $5 million around the end of the year. Backed by venture capital firm Kalaari Capital, it plans to expand beyond India and the US to the Philippines this year, said CEO Samhita R.

It’s still early days for disclosures around weather impact, however. Differences in climate modeling, including interpretation of data, various metrics and averaging options, can result in varied estimates of hazard and damage.

Companies are also hesitant to share details of financial impact from weather events in case it hurts valuations during exit deals. The biggest groups provide relatively more reporting on the exposure of specific real estate and infrastructure assets rather than their private equity portfolios. Only now is private equity becoming more transparent about emissions reductions after years of regulatory pressure.

Adriel Lubarsky, founder of risk management software company Beehive Climate said to truly safeguard assets, private equity investors need to be prepared to act on climate risk assessments. “You have to know what to do with the information and have both the capital and internal political capital to do something with it.”

Photograph: Firefighters try to contain a fire at a warehouse facility during a wildfire in Thessaloniki, Greece, on July 4, 2026; photo credit: Konstantinos Tsakalidis/Bloomberg