Rising temperatures and increasing water scarcity are combining to create a unique challenge for global growth broadly, and real estate especially, a new Moody’s report found. 

Heat and water scarcity, which Moody’s analysts say are two sides of the same coin, are threatening asset valuations around the world, the research found. The growing risks are concentrated regionally but should push insurers and reinsurers to reassess how they underwrite risk, the report says. 

“As heat and water stress develop from occasional shocks into permanent features, the financial sector faces both growing exposure and opportunity,” the authors wrote. 

“Insurers, reinsurers, banks and investors are unusually well placed to shape incentives, support adaptation and enable capital for resilient assets, if chronic perils are treated with the same rigor applied to physical perils, such as floods and severe storms.”

Moody’s took a sample of 159,000 water-intensive facilities across the U.S. and found that nearly 49,000 will face high or very high water stress by 2100. The facilities span three sectors: heavy manufacturing and processing, which made up 61% of the sample, mining and quarrying facilities, and food and beverage manufacturers. 

“For investors, both perils translate into operational risk, earnings volatility and stranded-asset exposure,” the report says.

Texas and California had the largest concentration of facilities projected to move into high-stressed status in the coming decades, while Louisiana and Oklahoma also have notable concentrations of at-risk properties.

“These projected transitions are concentrated in regions facing a range of existing and emerging water resource challenges, including recurring drought, pressure on major river systems such as the Colorado River and the Rio Grande, and declining groundwater availability,” the report says. 

The latest analysis comes on top of a recent study from climate risk data firm First Street that found that commercial real estate values in markets with higher risks of natural disasters were 16.9% lower than in markets with lower climate risk. 

The Moody’s report highlights the rising risk of drought and high heat further exacerbating wildfire risk, another growing climate challenge in the U.S. The 10 states with the highest exposure to wildfire risk carry $1.4T in reconstruction cost value, a Cotality report this month found. 

Banks and insurance firms could help proactively manage the risk by adjusting pricing to reflect the growing risks, the analysts wrote. Banks are well positioned to help their clients quantify the risks, while insurers can embed heat and water stress projections into their modeling.