Key takeaways
- El Niño can turn physical climate risks into financial risks.
- Companies’ exposure often extends far beyond their own assets.
- Supply chains and transport routes are key risk channels.
- Corporate resilience is becoming increasingly important for investors.
El Niño is often described as a climate phenomenon. For investors, however, it is increasingly relevant as a concrete example of how physical climate risks can become financial risks.
When trade winds weaken in the equatorial Pacific, warmer surface waters can shift eastwards and alter weather patterns across large parts of the world. The result can be droughts, floods, heat stress, water shortages and disruptions to transport infrastructure, agriculture and global supply chains.
That matters because many companies are more geographically exposed than their headquarters suggest.
“Physical climate risk does not stop at the company gate. It can travel through the value chain. Nordic companies may be based in Northern Europe, but their production sites, suppliers, logistics networks and customers often extend into regions historically affected by El Niño-related weather disruption,” says Mads Steinmüller, Head of Climate & Nature at Danske Bank Asset Management.
Physical climate risk can travel through several channels
The 2026–27 El Niño event is currently developing into what could be one of the strongest on record – a so-called Super El Niño – likely peaking between November 2026 and February 2027.
The investment relevance lies less in predicting the precise temperature outcome and more in understanding the potential channels of exposure. One key takeaway is that physical climate risk can affect companies in several ways:
- Facilities may face flooding, water shortages, heat stress or wildfires.
- Suppliers may experience lower output, higher costs or logistical constraints.
- Transport routes may be disrupted by low water levels or weather-related infrastructure bottlenecks.
- Commodity markets may tighten if agricultural production, fisheries, mining or energy systems are affected.
As Mads Steinmüller notes:
“For investors, this means El Niño should not be viewed simply as good or bad for markets. The more relevant question is where the exposure sits: in company assets, in supply chains, in key transport corridors, in commodity inputs or in end-market demand.”
Exposure often sits beyond company assets
In other words, exposure is not limited to a company’s own assets; it may also sit in suppliers, transport routes and critical infrastructure far beyond the Nordic region. Facilities, suppliers and logistics networks are often located in North America, Latin America, Southeast Asia, China and Australia — regions where El Niño-related weather changes can be financially relevant.
“Understanding dependencies on suppliers, transport routes and critical infrastructure can be just as important as understanding where a company’s assets are located,” explains Mads Steinmüller.
Resilience is becoming an investment question
The broader implication is that physical climate risk is becoming more relevant for investment analysis. From an investment perspective, a key question is whether companies are prepared for weather-related disruption today — through contingency planning, sourcing flexibility, insurance coverage, business continuity planning and clearer disclosure of asset locations and supply-chain resilience.
“El Niño is a reminder that investors increasingly need to understand geography, not just sectors; supply chains, not just direct operations; and resilience, not just exposure,” says Mads Steinmüller.
How we assess El Niño in our investment process
At Danske Bank Asset Management, we monitor El Niño forecasts because the phenomenon can have implications for both companies and financial markets. If the probability of a strong El Niño begins to rise, our investment teams analyse which sectors and companies may be affected.
“Among other things, we monitor water levels in the Panama Canal, as El Niño has historically led to drier conditions in the area. Lower water levels can limit ship traffic through the canal, create bottlenecks in global trade and affect transport and freight prices. At the same time, we follow developments in industries that have previously been affected by El Niño, where higher sea temperatures have led to significant losses, just as we assess the implications for the agricultural and insurance sectors,” says Mads Steinmüller.
The purpose is to understand how the changing weather conditions may affect companies’ earnings, costs and risk profiles, so that we can incorporate this into our investment analyses and investment decisions on behalf of our clients.
This publication is marketing communication and has been prepared for informational purposes only and does not constitute an offer or solicitation to make an offer to buy or sell any financial instrument.
