Extreme Heat Gets a Price Tag

“Summer has taken its time arriving in the Northeast, but it’s coming in HOT.” 

That was the warning from the National Weather Service this week as a blistering heatwave prepared to sweep across the US. For the millions without access to effective cooling — or anyone working outdoors — the health risks are clear. What’s less obvious, but no less serious, is the economic fallout this kind of extreme temperature event may bring.

This may be changing, however. Researchers and climate intelligence start-ups are working to quantify the dollar impacts of severe heat events, and use their findings to help businesses shape adaptation strategies. The Heatwave Economic Impact Forecast from climate intelligence company EHAB and adaptation consultancy DSR & Partners is one example. (Disclaimer: Climate Proof works with DSR & Partners on the monthly Adaptation10 series).

This combines EHAB’s 15-day meteorological forecast with an economic impact framework developed by DSR & Partners to estimate the financial damage of high heat events in countries around the world — starting with Germany. Unlike general climate risk models, which purely focus on long-term scenarios, the EHAB tool also offers near-term insights.

As of today (June 19), the tool estimates a €719.7mn (US$825mn) economic hit to Germany over the next two weeks from heat-induced productivity losses, higher cooling costs, business disruptions, and more. It’s the sort of number designed to force policymakers and business leaders to pay attention and take action.

“Putting a number on things is the only way that we’re going to address heat risks, because society don't seem to care about anything else anymore,” says Dr Andrea Nakoinz, an anesthesiologist and a member of the expert advisory board at DSR & Partners who masterminded the economic impact framework.

The dashboard is somewhat of a curtain-raiser for a broader product launch by EHAB next week, which will make it “super easy” to build similar data tools for all kinds of climate perils and geographies, according to Josh Graham, the company’s CEO. “Within five minutes, you could basically generate your own visual report, which you could then tweak and change in a chat with [an AI] bot.” The product can also send out alerts to a user’s team members when a certain extreme weather event looms, helping decision-makers to adapt in real time — whether that means rescheduling a construction job, reassigning outdoor labor, or pre-positioning grid maintenance crews.

TEMPERATURE TANTRUMS

For decades, extreme heat has been treated as a second-tier climate peril — dangerous, yes, but less dramatic than hurricanes or floods. That perception is changing fast. In the past year alone, half the global population suffered at least 30 additional days of extreme heat due to climate change. Between 2000 and 2019, heat exposure was linked to nearly half a million deaths annually.

Although the rising mercury has obvious health and safety implications, a growing number of analysts and entrepreneurs are working to define the economic and financial costs in order to engage businesses in the hard work of heat adaptation.

One estimate from the World Economic Forum suggests that heat could slash corporate fixed asset values by as much as US$448bn per year by 2035. Worker productivity is another potential sources of losses: in 2022, excessive heat caused an estimated US$863bn in lost income due to reduced labor capacity — particularly in agriculture, construction, and logistics.

Graham at EHAB has seen this dynamic at work first hand. “In 2022, when there was like that crazy heat wave in the UK, for the first time construction companies were talking to us about having delays because of the heat [because] you can’t pour concrete if it’s too hot, or you have to make sure that everyone’s taking extra breaks.”

However, while broad-brush estimates like these are helpful for framing the challenge, they are of little use when it comes to nudging individual companies to take action. “What shifts the decision-making calculus among business leaders is making this direct connection to business-level workforce health and productivity,” says David Leathers, Program Director of the National Commission on Climate and Workforce Health. “Combining business-level and real-time data would be a big breakthrough to help businesses understand and manage their heat-related workforce and operational risks,” he adds.

EHAB and DSR & Partners’ collaboration represents a first step in this direction. HeatWve, a new strategic consultancy founded by two former Accenture consultants, represents another. “We’re really focused on helping business leaders protect and grow earnings by identifying where revenue is at risk and where heat is reshaping cost curves,” said Co-Founder Clinton Moloney at a recent Climate Proof event.

He added that corporate and financial actors are finally waking up to the systemic nature of heat risk — and to the potential upsides, too. Such opportunities may take unusual forms, like the growth of a new night-time economy as daylight temperatures become too stifling for common leisure activities.

“Risk is one great lens, but it doesn’t attract investment and capital and innovation in the same way that growth and opportunity does. And that’s because growth really connects to democratic capitalism and the way that our economic system runs,” said Moloney.

The Health Action Alliance, a US employer network, has also created a Climate Health Cost Forecaster, which estimates potential long-term health care costs linked to poor air quality, flooding, and other risks — including extreme heat. These projections are useful to large companies gaming out future costs associated with their employer-sponsored health plans.

However, Nakoinz warns that coming up with very granular insights — the sort that are useful at the company level — is a laborious exercise. “Workplaces are so different. You would actually have to check in over a longer period of time to say: Okay, when it’s hot are these workers making more mistakes, or needing more time off?” she says.

FROM RISK TO ACTION

Tools like EHABs are likely to be of interest to utilities, construction firms, and insurers — industries where the stakes of heat exposure are material.

Power companies face a double bind: rising temperatures drive up demand for cooling, even as heat degrades the performance of transmission lines and generation capacity. More stress means more blackouts, higher maintenance costs — and greater wildfire risk. “For energy companies, their exposure to weather is incredibly multifaceted,” explains Graham.

This vulnerability is already playing out on the ground. Last year, Detroit-based DTE Energy CEO Gerardo Norcia said the company’s service territory sweltered for six days in 90 degrees Fahrenheit temperatures, one of the longest heat waves it had experienced in 20 years. He said the system held up well — this time around.

Insurers are increasingly alert to the knock-on effects of heat risks, too. In its most recent SONAR report, Swiss Re warned that heat-related claims are set to rise across property, engineering, agriculture, and life and health insurance. The strain on municipal systems could also trigger liability claims, particularly if vulnerable populations are left unprotected.

RETHINKING THE PERIL HIERARCHY

As climate attribution science improves and heatwaves build in frequency and intensity, the traditional categorization of this climate peril as an also-ran is becoming outdated. “The secondary perils are becoming not secondary,” says Graham. “They're having as much economic loss as primary perils.”

That reframing could have enormous implications for how companies price risk, allocate capital, and design resilience strategies. But this all hangs on organizations’ ability to confidently calculate the losses they face from heat if they do nothing. While EHAB and DSR & Partners have made a strong first attempt at tackling this problem, they know there’s still a long way to go.

“We’re doing this because we’d like to find out what are the factors that cost us most from heat? Is it productivity loss? Is it agricultural losses? Is it health? It is most likely a combination of all, but we don’t know. We have some numbers — but they’re not enough,” says Nakoinz.

Thanks for reading!

Louie Woodall
Editor