Beyond Carbon: Measuring Water & Wildfire Risk in Southern California and Los Angeles Area Investments
- Gustaf Rounick, CFP®, ChFC®
- Jul 15, 2025
- 7 min read
Updated: Jul 21, 2025
The Next Frontier of Climate Risk
Investors have spent the past decade calculating the greenhouse-gas footprint of everything from index funds to almond orchards, but carbon tells only part of the story. In Southern California, the most acute threats to long-term value are water scarcity and wildfire—hazards that can erode earnings, impair collateral and reshape regional growth even if a portfolio is already “net-zero.” Treating those perils with the same discipline we apply to carbon accounting is now essential for anyone allocating capital in the Golden State.
A Shrinking Water Pie
A May 2025 study led by UC Davis and UC Merced projects that California will lose four to nine million acre-feet of annual supply—12 % to 25 % of current use—by 2040 as climate change, tighter groundwater rules and smaller Colorado River allocations converge¹. The authors estimate direct economic losses of up to $11 billion per year in a “worse future” scenario, with ripple effects pushing total losses to $14.5 billion and 67,000 jobs. For investors, that is a material headwind to water-intensive sectors ranging from agriculture to semiconductors.
From Deluge to Drought, Faster
The 2024–25 water year underscored the volatility. Record summer heat followed a wet winter, then January precipitation plunged below average, leaving Southern Sierra snowpack—30 % of the state’s supply—well under normal levels². Even after February storms, the Department of Water Resources could promise only 35 % of requested State Water Project deliveries. Such whiplash complicates revenue forecasts for utilities and municipalities that depend on volumetric sales, and it heightens the risk of mandatory rationing that can crimp residential property values.
Water Rules Are Tightening
Scarcity is not just meteorology; it is regulation. On January 1, 2025 the State Water Resources Control Board put “Making Conservation a California Way of Life” into force, requiring every urban retailer to meet annual use objectives. Groundwater basins that fail to file acceptable sustainability plans now face probation. Portfolio companies operating in those basins could see higher pumping fees or forced cutbacks, a risk largely absent from standard credit models.
Putting Numbers on Water Risk
Fortunately, investors no longer have to guess. The World Resources Institute’s Aqueduct Water Risk Atlas offers asset-level indicators for baseline stress, drought severity, and future demand³. At the corporate level, MSCI’s ESG Water-Stress Key Issue scores grade issuers on exposure and management, signalling which credits may be one regulatory drought away from downgrades⁴.
A Landscape Primed to Burn
If water scarcity is a slow bleed, wildfire is a sudden shock. January 2025’s Palisades and Eaton fires scorched almost 48,000 acres of Los Angeles County, damaging or destroying more than 16,000 structures and causing up to $53.8 billion in property losses⁵ ⁶. Business-interruption models project another $4.6 billion to $8.9 billion in lost output over five years. The scale rivals a moderate recession—and it unfolded in a single week.
Mapping the Flames in HD
Granular data are catching up to the hazard. First Street Foundation’s RiskFactor tool assigns every U.S. address a present-day and 30-year wildfire probability on a 1-to-10 scale⁷. CAL FIRE’s April 2024 Fire-Hazard Severity Zone maps classify state- and local-responsibility areas as moderate, high or very high risk, with a 2025 update covering most of Southern California⁸. CoreLogic’s 30×30-meter Wildfire Risk and Mitigation Scores, already used by insurers, score properties 0.1-100 and quantify how defensible-space retrofits cut loss expectancy⁹. Integrating these layers lets investors stress-test cap rates, loan-to-value covenants and insurance availability before committing capital.
Beyond Heat Maps: Forward-Looking Scores
Moody’s subsidiary Four Twenty Seven blends facility geolocation with climate models to generate issuer-specific physical-risk ratings—including heat, water stress and wildfire—for more than 1.5 million firms worldwide¹⁰. Fixed-income desks are already using those scores to adjust spread targets; Westlight applies them to municipal-bond research, flagging water-agency revenue bonds whose service areas overlap high-hazard zones. Adding Four Twenty Seven to Aqueduct and CAL FIRE creates a three-tier framework: basin risk, parcel risk and issuer resilience.
Case Study: Ventura County Apartments
In late 2024 a sponsor offered units in an inland Ventura submarket at what looked like an attractive 5.7 % cap rate. Aqueduct showed increasing water-stress scores toward the end of the decade, while RiskFactor assigned many parcels a wildfire rating of 9 out of 10. Insurance quotes had already climbed 62 % in two renewals. By modelling a 200-basis-point insurance-cost shock and a two-week fire-induced vacancy, Westlight projected IRR could fall below 6 %—well under our target hurdle—so we declined the allocation.
Municipal Bonds: Hidden Exposure
Southern California localities finance water-recycling plants and wildfire-hardening projects in the tax-exempt market. Elevated climate risk can raise their borrowing costs and, if unaddressed, pressure debt-service coverage ratios. We review Official Statements for disclosure of wildfire severities, water-conservation mandates and post-fire rebuilding timelines. Issues lacking credible resilience plans face a higher probability of rating action—an element we price into credit spreads before recommending positions.
Los Angeles’s Water Equation
For investors with exposure inside the city limits, the starting point is the Los Angeles Department of Water & Power (LADWP). Roughly half of LADWP’s annual supply still comes from the Metropolitan Water District’s imports—Colorado River and State Water Project water that climate change is steadily shrinking—while the balance is a blend of local groundwater, stormwater capture, and the century-old Los Angeles Aqueduct¹¹. That split matters: every percentage point of imported water LADWP cannot secure must be replaced at a higher marginal cost, squeezing city finances and, by extension, municipal-bond coverage ratios and utility pass-throughs for multifamily owners.
Drought Allocation Reality Check
The pressure showed again this spring, when the Department of Water Resources confirmed that MWD agencies—including Los Angeles—will receive just 35 percent of their requested State Water Project deliveries for 2025¹². Even with a wetter-than-average February, Lake Mead’s Level 2a shortage declaration remains in force, curbing Arizona and Nevada withdrawals and reinforcing the likelihood of deeper Tier 2 cuts for California if runoff disappoints next year. For asset models, this means assuming higher purchase prices for supplemental supplies and an increasing risk of emergency surcharges on commercial and industrial meters.
Recycled Water Moves Center Stage
City hall’s answer is to build local water independence. Through the Pure Water and Operation NEXT programs, officials plan to recycle up to 30,000 acre-feet a year by 2045—enough to meet about 15 percent of today’s citywide demand—and to recharge the San Fernando Basin with treated Hyperion flows¹¹
Everyday Restrictions That Bite
Still, conservation mandates remain the front-line tool. Under the standing Emergency Water Conservation Ordinance, most addresses face three-day-a-week irrigation limits, eight-minute sprinkler run-times, and rising fines for repeat violations¹³. During the 2022 Phase 3 restrictions those limits dropped to two days, cutting seasonal water sales by nearly 9 percent and knocking a comparable chunk off revenues linked to volumetric rates. If the city re-enters Phase 3—an outcome our scenario analysis assigns a 40 percent probability whenever Sierra snowpack starts April 1 below 75 percent of normal—multifamily landlords relying on lush landscaping for rent premiums should stress-test for brown-lawn vacancies.
The County’s Wildfire Bull’s-Eye
Water stress is slow, but wildfire strikes hard. L.A. County’s updated Fire-Hazard Severity Zone maps place more than 1.3 million structures in “High” or “Very High” zones, including hillside neighborhoods that anchor some of the priciest real estate in the nation¹⁵. Independent modeling backs that up: First Street Foundation found that 94 percent of homes destroyed in the January 2025 Palisades and Eaton fires were already rated “severe” or “extreme” on its 1-to-10 Fire Factor scale¹⁴. Put differently, map-based early-warning signals were blinking red long before flames arrived—a reminder to bake parcel-level risk scores into pre-deal due diligence instead of treating them as an insurance afterthought.
Insurance Market on Edge
That afterthought is getting expensive. A January 2025 Milliman survey showed average homeowners ' policy premiums in L.A. County jumping 23 percent year-over-year, with carriers either capping coverage or exiting ZIP codes where brush clearance costs exceed modeled premiums¹⁶. Kiplinger estimates total insured losses from the 2025 fires between $135 billion and $150 billion, a blow that is accelerating the shift of at-risk properties into California’s FAIR Plan backstop¹⁷. For investors, the implication is clear: treat insurance availability and deductible creep as a fundamental underwriting input, not an operating expense you can refinance away down the road.
Building Resilience Into Portfolios
Investors can mitigate water and wildfire risk without abandoning the region. Capital-expenditure allowances for defensible space, fire-resistant materials and smart-irrigation retrofits can enhance tenant retention and lower insurance deductibles. Municipal green bonds that fund water-recycling and undergrounding of power lines offer opportunities to earn tax-free income while bolstering community resilience. At the security-selection level, overweight issuers with robust disclosure and adaptive-capacity plans; underweight those with scant detail or deferred maintenance.
From Data to Decisions
Treat water and wildfire metrics as living inputs, updated at least annually. We recommend ranking assets by percentile exposure and setting position-size limits that tighten as risk rises. Monitoring insurance-market signals—premium hikes, carrier withdrawals, FAIR-plan usage—adds a market-based check on model outputs. Finally, engage with issuers: ask REITs about water-recycling retrofits and ask municipalities how they will fund brush clearance once one-time federal grants expire.
Your Next Step
If you hold property, municipal bonds or operating businesses in the region and want to understand how these hazards could affect your portfolio, reach out to schedule a complimentary resilience review.
Required Disclosure
Westlight Wealth is a registered investment adviser. The information herein is educational and does not constitute investment, legal or tax advice. Opinions and forward-looking statements are current as of July 15, 2025, and subject to change without notice. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal. Consult your professional advisers before acting on any information presented.
Gustaf Rounick, CFP®
Works Cited
1 California’s Water Crisis: Insights from UC Davis/UC Merced — Water Blueprint CA. https://waterblueprintca.com/ca-blog/californias-water-crisis-insights-from-uc-davis-uc-merced-and-the-case-for-infrastructure-investment/
2 “The State of California Water in 2025,” Latham & Watkins. https://www.globalelr.com/2025/03/the-state-of-california-water-in-2025/
3 Aqueduct Water Risk Atlas — World Resources Institute. https://www.wri.org/data/aqueduct-water-risk-atlas4 MSCI ESG Ratings Methodology: Water Stress Key Issue. https://www.msci.com/documents/1296102/34424357/MSCI%2BESG%2BRatings%2BMethodology%2B-%2BWater%2BStress%2BKey%2BIssue.pdf
5 Impact of 2025 Los Angeles Wildfires — LAEDC. https://laedc.org/research/reports/impact-of-2025-los-angeles-wildfires-and-comparative-study/
6 Irfan, U. “Why it’s taking LA so long to rebuild,” Vox, July 15 2025. https://www.vox.com/climate/419719/los-angeles-wildfire-ceqa-california-abundance-housing
7 Murphy, J. “What’s your home’s wildfire threat score?” AccuWeather, May 20 2022. https://www.accuweather.com/en/severe-weather/whats-your-homes-wildfire-threat-score-a-new-tool-lets-you-find-out/1190153
8 “New Fire Hazard Severity Zone Maps,” SoCal GIS, March 24 2025. https://socalgis.org/2025/03/24/new-fire-hazard-severity-zones-maps/
9 CoreLogic Wildfire Mitigation Score Datasheet 2024. https://pages.corelogic.com/hubfs/CoreLogic%20USA/Website%20PDF%20Files/INS-Hazard%20Risk-Mitigation%20Score%20Datasheet-2024.pdf
10 Moody’s ESG Solutions: Physical-Risk Metrics from Four Twenty Seven. https://www.moodys.com/web/en/us/insights/esg-risk/esg_score_predictor_applying_a_quantitative_approach_for_expanding_company_coverage.html
11 Los Angeles Department of Water & Power, Pure Water Bridging Plan Reference Document, March 2025. https://www.ladwp.com/sites/default/files/2025-03/2025_REFERENCE_DOCUMENT_PureWater_Bridging_Rev11.pdf
12 Pasadena Now, “Metropolitan Water District Allocation Rises to 35%,” March 24 2025. https://pasadenanow.com/main/metropolitan-water-district-allocation-rises-to-35-ensuring-sufficient-water-supply-for-2025
13 Los Angeles Department of Water & Power, Water Conservation Ordinance. https://www.ladwp.com/who-we-are/water-system/water-conservation/water-conservation-ordinance
14 First Street Foundation, Review of LA Wildfires: 94% of Destroyed Properties Had Severe Risk, February 19 2025.
15 Los Angeles County Fire Department, Fire Hazard Severity Zone Maps, adopted January
16 Milliman, “California Homeowners Insurance: Current State of the Market and
Implications of the Los Angeles Wildfires,” January 22 2025. https://www.milliman.com/en/insight/california-homeowners-insurance-los-angeles-wildfires
17 Kiplinger, “California’s Home Insurance Crisis: Rising Risks, Soaring Costs and Coverage Gaps,” February 2025. https://www.kiplinger.com/personal-finance/home-insurance/california-wildfires-home-insurance-crisis
18 Los Angeles Department of Water & Power, Operation NEXT Fact Sheet, May 3 2023. https://webprod.ladwp.com/sites/default/files/2023-08/2023.05.03%20OperationNext_FactSheet_Final.pdf
