By David Lont, Martien Lubberink & Paul Griffin*
When record-breaking heatwaves cause train tracks to bend, airport runways to buckle, and roads to melt, as happened in the United Kingdom last month, it is likely that business performance will suffer.
The problem is not going away, either. Businesses will need to better manage extreme heat risk. But are investors sufficiently informed on the economic toll caused by the increasing frequency of extreme weather?
It is becoming clearer that extreme heat can have devastating and costly effects. People are dying, energy grids are struggling to cope, transport is disrupted, and severe drought is straining agriculture and water reserves.
While the frequency of these events is increasing, more worrisome is that heat intensity is also increasing. Clearly, businesses are not immune to the need to adapt, though their silence might make you think otherwise.
Rising temperatures affect everything
Keeping cool, transporting goods, and scheduling flights as runways melted were just some of the challenges people and businesses have faced during the current European summer.
As it became apparent that our workplaces and infrastructure might not be able to cope with extreme heat, we also saw unions call for workers to stay home. But could workers take the day off? The UK’s Home and Safety Executive stated:
There is no maximum temperature for workplaces, but all workers are entitled to an environment where risks to their health and safety are properly controlled.
Are these rules sufficient in this new normal? Some EU countries already have upper limits, but many do not. The Washington Post reported US federal action might be coming due to concerns over extreme heat for workers. Mitigation of these factors will no doubt be costly.
While media reports highlight the toll on workers and businesses, there is little empirical evidence on the financial hit to business. Here is where our research comes into play: how much of an impact does extreme heat have on business profitability?
Heat hitting the bottom line
We focused on the European Union and the UK because the region has a diversity of climate and weather extremes. They are a major economic force, with strong policies on decarbonising their economies, but also rely on coal, gas, and oil for many sectors.
When it’s hot, these countries are forced to burn more fossil fuel to cool overheated populations, contrary to the need and desire to do the opposite.
With detailed records on heat events at a local level, we connected weather data to a large sample of private and public companies in the EU and the UK. We focused on two critical aspects of a firm’s financial performance around a heat spell (at least three consecutive days of excessive heat): the effect on profit margin and the impact on sales. We also examined firms’ stock performance.
We found that businesses do suffer financially, and the effects are wide ranging.
For the average business in our sample, these impacts translate into an annualised loss of sales of about 0.63% and a profit margin decrease of approximately 0.16% for a one degree increase in temperature above a critical level of about 25C.
Aggregated for all firms in our sample, UK and EU businesses lose almost US$614 million (NZ$975 million) in annual sales for every additional degree of excessive temperature.
Impact bigger than the data shows
We also found the intensity of a heat wave is more important than its duration.
This financial effect might sound small, but remember, this is an average effect across the EU and the UK. The localised effect is much larger for some firms, especially those in more southern latitudes.
The stock market response to extreme heat is also muted, perhaps for the same reason. We find stock prices on average dropped by about 22 basis points in response to a heat spell.
These average annualised effects include businesses’ efforts to recoup lost sales during heat spells. They also include businesses in certain sectors and regions that appear to benefit from critically high heat spell temperatures, such as power companies and firms in northern European countries.
While we show a systematic and robust result, our evidence probably further underestimates the total effects of heat waves. That’s because businesses disclose very little about those effects due to lax disclosure rules and stock exchange regulations relating to extreme weather.
Financial data part of climate change
Without a doubt, better disclosure will help untangle these effects.
Ideally, financial data needs to be segmented by climate risk and extreme heat dimensions so investors are better able to price the risk. Regulators need to pay attention here. Investors must be able to price material risk from extreme weather.
A good example is New Zealand, which is about to mandate climate risk disclosures with reporting periods starting in 2023. Such mandates recognise that poor disclosure of climate risk is endemic, and we don’t have the luxury of time.
For those businesses negatively affected, disclosing the number and cost of lost hours and the location of the damage would be helpful. However, it is not yet clear if climate disclosure standards effectively capture these risks, as companies have significant discretion about what to disclose.
It is not necessarily all about cost – some sectors might even benefit. While power companies, for example, might report increased sales from increased energy consumption, they are also constrained by the grid and the increased cost of production.
And our evidence suggests there is little overall benefit to the energy sector. This doesn’t rule out some windfall profits, so we need to understand more about both the positive and negative effects on each industry.
Finally, this July saw temperatures in the United Kingdom soar to 20C above normal. Can businesses cope? Next time you feel the heat, pause to ask if this is also hitting the bottom line of your workplace or investment portfolio.
*David Lont, Professor of Accounting and Finance, University of Otago; Martien Lubberink, Associate Professor of Economics, Te Herenga Waka — Victoria University of Wellington, and Paul Griffin, Distinguished Professor of Management, University of California, Davis
This article is republished from The Conversation under a Creative Commons license. Read the original article.
44 Comments
Hmmm....?
So this article is written by Academics whose source is a link to a newspaper article in which I can find no mention of their claim of:
'this July saw temperatures in the United Kingdom soar to 20C above normal.'
Yes, Academia is the problem here - but shooting the messenger (as you do) misses the point as much as they do.
The global heating is simple physics, and we're shooting ourselves in the foot. Only paid obfuscators or vested-interest people deny that (dragging along a few of the fearful, for sure, or they wouldn't bother).
But the bigger problem is the stuff we are burning, to get the energy, with which we do work, which ends up entropically as low-grade heat. Indeed, ex-CC, we would boil the oceans in 400 years just on work-caused heat alone (except it's an oxymoron; we wouldn't die off en route).
And the stuff is finite, we've burnt the best half (and already gotten ourselves into a major pickle) and we've used it to overshoot our species and to create a never-bigger, never-more decayed collection of infrastructure. So we have a Systems predicament; multi-faceted with multiple feed-back loops, many irreversibly reversible.
Siloing - made worse during the Joyce years - is a fatal flaw. It too, has negative feed-back loops.
Well, you will know what 'shooting the messenger' feels like.
However when the messenger presents 'lazy' facts, then they deserve some push back.
Yes, we can all agree there is a chasm to cross, but it is helpful to be able to measure correctly. There is no point thinking you can cross the chasm in two steps, or leaping 6 feet to clear every little crack that appears in front of you. Data matters, and accurate data even more.
The World Meteorological Organization, defines a heat wave as five or more consecutive days of prolonged heat in which the daily maximum temperature is higher than the average maximum temperature by 5 °C (9 °F) or more
So the UK measure for a heatwave is ‘A period of marked unusual hot weather (which for the UK can be as little as 24C) over a region persisting for at least three consecutive days during the warm period of the year.
The authors of this report have chosen the lower of limits 'We define a heat spell as occurring when the temperature exceeds the 95th percentile of the daily temperature at the same location in the same season over the past five years for at least two consecutive days.'
The continue redefining of definitions to make the once ordinary now extraordinary to fit a narrative is bad enough by the media, but is inexcusable for academics, especially from the sciences.
And in doing so, undermines the likes of yourself as it ends up tarring everyone with the same brush.
Are you saying that 41 degrees is not 20 degrees above normal in the uk?
https://weather-and-climate.com/London-July-averages
Average high of 23C in London (generally the hottest place)
No, you lost me because I don't understand why them not explicitly saying that 41C is 20 degrees above average in the article is the thing you hone in on.
The linked article is still about the record breaking heat in the UK, which is what they were writing about. Seems relevant to me.
Well of course it is lost on you Because you DID misread the article and DID think it was talking about a 20C rise in the UK.
Some people never know they are lost because they never know what the end goal looks like.
It obviously isn't important to you where you get your information from, and how accurate it is.
My point is that the first article is not just another journalist writing for the likes of yourself, but three economists. I know it may be asking too much of even economists but I would have expected them to be more accurate in their writing and where they get their data from, although economists are known to be not that accurate in their forecasting, so no surprises really.
It's poor professional methodology for them to link to a MSM article that headlines about the UK Heatwave and then offers wider European data, as though it is specific to the headline, and would be obviously read as such by lazy readers such as yourself.
London has a much more variable climate than we are accustomed to in New Zealand due to its proximity to the continent.
While it's true that temperatures are normally in the 20s, contrary to the stereotypes that some kiwis hold about UK weather, it's completely normal and expected to have a few episodes of heat in the mid to high 30s during the summer months when a bunch of hot air gets pushed up from North Africa.
Blithering about temperatures being 20 degrees above "normal" is alarmism. It was a couple of degrees higher than a normal summer hot spell.
I think I'll believe the science on this one, rather than an anonymous climate denier on a web page. :-)
No worries mate. I'll refrain from sharing my lived experience with London weather spanning decades lest some mouth breathing basement dweller in Hicksville, New Zealand shrieks "climate denier" at me.
It's normal for it to be 23 degrees on the dot there without fail. The nerve of anybody to suggest otherwise right?
The thing is, Aaron, I never made any claim about there being no rising temperatures.
That's a somewhat tedious straw man fiction that you are concocting.
I simply pointed out that temperatures in the mid to high thirties are completely normal in London for some days during summer, and I explained the cause of them, therefore the journalistic hand waving about "20 degrees above normal" is over the top alarmist nonsense.
Perusing some of your work, there is no doubt that you are well acquainted with how "journalists" twist facts when they want to push a certain narrative.
If I were All Blacks coach, my first act would be to disband them, fire them, ban Rugby and divert all the money wasted on it into building proper ski resorts and mountain bike infrastructure.
Am I hired?
Err, 23degC is the average daily high for London in July/August. Half the time the daily high will be below that figure, half the time above that figure. That's how averages work :-) 40degC is nearly 20degC above that figure. Quite extreme l would have thought? Being a new national record kinda underlines that, even to people that breathe through their mouths. And don't diss people living in basements, they are perfectly comfortable!
... and I even took the time to kindly explain the geographical reasons for the variability before you started with the moronic "climate denier" name calling.
P.S. The reported 23 degrees average is a (mean), so, no, that's not how it works. It's how a median works. Sharpen up and learn the difference.
the maximum working temperature may be subjective, depending on who you ask, blood temperatures can be anywhere between 34-37 Centigrade, there are a few cool dudes I heard one nurse remark as she stuck a thermometer in my ear.
The then are the cooling effects of humidity and airflow plus the heating effect of a radiant object, working in the the sun for example.
Best let everyone who can work from home if they wish, problems solved.
Ah, the old, "but it was hotter in one part of 1.87% of the Earth's surface, back in 1930" meme. https://www.epa.gov/climate-indicators/climate-change-indicators-high-and-low-temperatures
You don't like US EPA data so post some US EPA data that has nothing to do with the articles subject. I guess you just missed the US EPA heatwave page. You're welcome.
"Longer-term records show that heat waves in the 1930s remain the most severe in recorded U.S. history (see Figure 3). The spike in Figure 3 reflects extreme, persistent heat waves in the Great Plains region during a period known as the “Dust Bowl.” Poor land use practices and many years of intense drought contributed to these heat waves by depleting soil moisture and reducing the moderating effects of evaporation.6
https://www.epa.gov/climate-indicators/climate-change-indicators-heat-w…
Thanks for taking an interest in our research!
So why is our paper relevant? At its heart, we believe markets are a good place to price risk, but disclosure is currently poor and so pricing this is hard. We also see a role for regulation to ensure Greenwash is minimized. If we wait until all this is sorted out, we may be too late to ensure sensible plans to adapt.
There are many examples in the media of the impact of extreme weather, so it is not hard to imagine businesses being impacted and the need for adequate disclosure. But what do we know of their plans or if it is impacting their financial performance?
Our research seeks to answer this question using academic rigor but based on imperfect information and models. This is a topic of increasing importance given the increasing frequency and severity of heat spells attributed to global warming, but one so far given a short shift by the research community.
While no single factor is the cause, heat spells with extreme temperatures most likely impact business activity through degraded infrastructure, lower worker productivity, higher costs, and the absence of customers. Extreme heat can also impact health and safety requirements which can further add to costs, such as workers’ absence and impacts on their physical and mental well-being.
Our research shows that business activity drops in response to extreme heat spells with critically high temperatures, mainly through a drop in customer sales. When it’s too hot, maybe customers stay home, prompting a drop in sales due to lower demand. The efforts of salespeople may decline too. However, our finding is an average effect over different kinds of business in different locations. Some businesses sell more in extreme heat situations: power companies sell for electricity as people try to keep cool. People may buy more air conditioners. Hospitals may see more patients. Extreme heat can also affect firms with operations in naturally hotter latitudes differently from those in naturally colder latitudes.
What surprised us most was that while we thought that longer heat spells would degrade business performance more than shorter heat spells, heat spell duration had no impact, as if businesses were immune to this factor. Businesses, however, did not have immunity to heat spell intensity. Heat spells with extremely hot days drove sales down, not heat spells with simply more hot days.
Affected firms should consider their strategic response and, if necessary, prepare a business plan that shows how they will adapt to the new norms. In short, there is an unpriced risk, and disclosure will help. So our main message is better disclosure to price this is needed to help investors make informed choices. So, even with all the imperfections, the key point remains. We need relevant disclosure now as heat intensity is forecast to get worse. Firms that fail to disclose material risk also may face increased litigation risk from class actions by investors who may feel like they were not sufficiently informed.
Better disclosure would also allow more studies with better data and methods to provide investors and managers with more accurate answers.
So it is fine to read our paper with a grain of salt. We agree better models and data are needed! But we need to start somewhere and have a good dialogue on how to improve from our current knowledge. So suggestions are welcome. For those interested, we use NOAA definition of a heatwave, but there are several definitions as some have suggested. Using a shorter period makes it harder to find a result. Our baseline to determine an extreme weather event is also more recent than is typically used. As the baseline is rising over time, this also makes finding a result harder.
And while not that important to our key message, the July heat event is widely reported to have broken heat records and led to the first red warning in the UK. Unfortunately, we swapped out the Washington Post article showing this at the last minute as it has a paywall, and we thought the Guardian article confirmed the point, but here is the link. I provide a couple of other links to show this was not just a hot July day for those that are interested.
Here are some of the records broken by the United Kingdom heat wave this week - The Washington Post
First ever 'red' warning in U.K. as extreme heat spreads over Europe - The Washington Post
UK heat wave: Extreme heat is exposing a country woefully unprepared for the climate crisis - CNN
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