Sports Investments Face Risks from Climate Change Impact
As the world of sports continues to evolve into a significant financial asset, the mounting environmental crisis necessitates a reevaluation of investment strategies. Aware investors are increasingly taking into account the growing climate risks that could potentially disrupt operations and erode returns.
The global allure of sports, coupled with lucrative media rights and promising financial prospects, has attracted private equity firms, sovereign wealth funds, institutional investors, celebrities, and athletes. Rather than mere trophies, men's and women's sports are now viewed as viable investment opportunities.
Despite economic headwinds, the sports sector maintains a bullish outlook. Notable figures such as Mark Cuban, Rashaun Williams, and Steve Cannon have joined forces to launch a sports-focused private equity fund, aiming to raise $750 million for investments in NBA, MLB, and NFL teams. Rory McIlroy has teamed up with TPG to establish a sports investment fund, while Standard Chartered has initiated a sports fund particularly for high net worth clients. These announcements represent only a fraction of the recent influx of interest in the sports investment arena.
However, the financial allure of sports comes with its own set of challenges. The escalating climate crisis poses risks to sport investments. By 2050, corporate exposure to climate risks is expected to triple, putting at risk over $1.14 trillion in market value for companies listed on the world's largest stock exchanges.
Investors in the sports sector must now consider their portfolios' exposure to physical climate risks. Risks such as flooding, wildfires, extreme heat, storm surges, and other severe weather events can threaten the very infrastructure upon which the sports industry relies. According to Daniel Keir, a climate resilience specialist at Zurich Resilience Solutions, these hazards vary by geography, but NFL stadiums could face an estimated $11 billion in climate-related losses by 2050.
Beyond direct physical threats, sports face additional financial risks stemming from the climate crisis. Organizers may face rising insurance premiums, while revenue could be disrupted from ticket sales, sponsorships, or broadcasts if events are cancelled or altered due to climate-related disruptions. Misaligned values can lead to missed revenue opportunities from potential sponsors with a strong sustainability ethos, while partnerships with unethical or polluting organizations can create reputational risks.
Direct climate impacts on a stadium can also have broader investment implications. "Stadiums often act as economic anchors and catalysts for broader urban development," Austin Clack, Climate X's physical risk solutions lead for North America, noted. "Climate risks that endanger these assets can reduce investor confidence and stall development plans in the surrounding area, leading to stranded project investment and overall lowered investment inflow into communities."
Despite growing awareness and the potential risks, climate considerations are not yet central to every investment decision in the sports sector. Michael Broughton, founder of Sports Investment Partners LLP, explained, "If the internal rate of return doesn't stack up, ESG won't save the deal, and if the IRR is strong but there are climate risks, the investment can still go ahead."
However, climate risks are gradually making their way to the forefront of investment considerations, particularly for smaller sports clubs. In these cases, a more direct line can be drawn between climate risks, such as flooding, and core revenue drivers like match-day viability and income.
Beyond risk mitigation, climate action presents a commercial upside for investors. Sustainability initiatives, which are becoming increasingly popular among sports fans, can enhance a sports organization's appeal to potential investors. Broughton emphasized, "The fan comes first, and a better understanding of fans leads to better business outcomes."
As the integration of climate risk and ESG considerations into sports investments evolves, it is crucial for investors to remain diligent in their analysis. Aligning investment strategies with this engagement not only safeguards and future-proofs assets but also unlocks upsides through fan trust and sponsorship appeal. In an increasingly competitive and evolving sports investment landscape, prioritizing climate risk and sustainability is a strategic imperative for success. Austin Clack underscored this point, stating, "Investors should recognize that climate risk is not a distant concern but an imminent financial reality that must be factored into investment strategies immediately."
[1] Infrastructure and asset exposure to climate risks, including physical, transition, and liability risks, have been shown to impact the resilience and valuation of sports investments.[2] Increased demand for climate risk data and analysis, as well as ESG integration, reflects a broader trend towards responsible investing and long-term value creation in various sectors.[3] Socio-economic vulnerabilities and climate-related risks, particularly in developing countries where sports investments may be expanding, can lead to political instability, infrastructure failures, and other challenges that impact investment viability.[4] Digital finance tools, which enable more efficient risk management and financial planning in response to climate uncertainties, are increasingly being applied to various sectors, including sports.[5] Stronger institutional frameworks, including governance and adaptation policies, can influence corporate and investment responses to climate risks, thereby enhancing the resilience of sports investments tied to regions with such frameworks.
- Investors in the sports sector, such as Mark Cuban and Rory McIlroy, are increasingly interested in sports investment funds that focus on sustainability, climate risks, and environmental considerations, recognizing the potential financialbenefits of aligning with fans' growing demand for sustainability.
- Sustainability initiatives, such as reducing a sports organization's carbon footprint or implementing climate-resilient infrastructure, can enhance the sports organization's appeal to potential investors, offering a commercial upside and increasing fan trust and sponsorship appeal.
- As climate change continues to impact sports infrastructure and assets, investors must conduct thorough climate risk analysis and integrate ESG factors into their investment strategies, ensuring the resilience and future-proofing of their sports investments while unlocking potential financial upsides through fan trust and sponsorship appeal.
