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It’s hot out there and getting hotter. The last few weeks have brought some of the highest temperatures on record at great cost to human health and wellbeing. For a moment, the office air conditioning can feel like a refuge from the extremes outside, but it may be time for businesses to start feeling the heat.
At the heart of the issue is what climate experts call “physical risk.” This term is somewhat self explanatory. The physical effects of climate change pose a physical risk to businesses’ assets and operations—think of hurricanes, wildfires, and flooding, to name a few. These extreme weather events are financially material, and hurt the bottom line. A 2021 report from Impax Asset Management Group found that two-thirds of large companies globally have at least one asset highly exposed to the physical risk of climate change; it’s likely the share of at-risk companies has grown since then.
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“This is actually going to touch every sector,” Brian Deese, recently President Biden’s top economic advisor, told me in 2020 when he was the global head of sustainable investing at Blackrock. “Those risks, while they do accelerate out into the future, are more pressing on the market today than most market participants understand.”
Phenomena like fires and floods may be the most obvious example of physical risk, but heat falls into the same bucket. Indeed, a 2021 Moody’s report identified heat stress as one of two physical risks that affect almost every sector. In agriculture, heat can kill crops. That harms retailers, too, who are dependent on crops in their supply chain. For the travel industry, extreme heat can shift consumer demand—making some destinations desirable and others anathema. Across many sectors, heat stress makes it more difficult—and at times impossible—for employees to work outside.
A quick look at financial disclosures shows many big companies are already noting heat as a material financial risk to their operations. Walmart, for example, says the company is vulnerable to rising costs of cooling its massive facilities; Disney says excessive heat may affect demand for its tourism products.
And, if the direct impact on individual businesses weren’t enough, there’s also a macro effect to consider: a significant body of research now shows that extreme heat is a drag on the global economy. A study published in the journal Science Advances found that human-caused extreme heat cost the global economy as much as $29 trillion between 1992 and 2013. A different study from the Climate Impact Lab found that higher temperatures could reduce the average income globally by nearly a quarter by 2100 compared to a no-climate-change scenario.
Where does this all leave companies? Those with adequate resources are building programs to address heat risk. Walmart, for example, is assessing its supply chain to ensure it can bounce back from extreme weather—including heat stress—as part of a comprehensive climate program.
Beyond the week-to-week, month-to-month impact of heat, it’s also important to consider the role businesses can play in avoiding the worst possible heat. By cutting their own carbon emissions—and pushing a bigger societal shift toward a low-carbon economy—companies not only protect their own growth prospects but also the wellbeing of all of society.
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Write to Justin Worland at firstname.lastname@example.org