Businesses’ bottom lines suffer from extreme heat

Extreme heat spells have detrimental effects on businesses, reducing customer sales and increasing costs, new research shows.

The paper, which is still under peer-review, investigates the impact of extreme temperature heat spells on firms’ sales and profit margin, an area in need of more timely research.

David Lont image

Professor David Lont.

Professor David Lont, of the University of Otago, teamed up with Associate Professor Martien Lubberink, from Te Herenga Waka – Victoria University of Wellington, and Professor Paul Griffin, of the University of California, Davis.

The researchers analysed detailed records of local heat events against a large sample of private and public companies in the United Kingdom and European Union from 2001 to 2019.

Results show that businesses suffer financially, and the effects are wide-ranging.

On average, businesses had an annualised loss of sales of 0.63 per cent and a profit margin decrease of 0.16 per cent for a one-degree increase in heat spell temperature above a “critical level” of about 25 deg C.

Aggregated for all firms over their sample, UK and EU businesses lose almost US$614 million (NZ$975 million) in annual sales for every additional degree of excessive temperature.

Professor Lont, from Otago’s Department of Accountancy and Finance, says there are many possible reasons for this.

“If it gets too hot, we might expect lower workplace productivity as staff efforts decrease or a drop in sales due to lower customer demand as people opt to stay home,” he says.

Martien Lubberink image

Associate Professor Martien Lubberink.

“Degraded infrastructure, such as roads and runways melting, can cause transport issues which disrupt business and increase costs. Often buildings in higher latitudes are designed to let the sun in, not keep it out.

“And this is what we find in our study – firms in more climate-vulnerable areas are impacted more.”

However, Associate Professor Lubberink says some businesses might sell more in extreme heat spells.

“Power companies, for example, sell electricity as people try to keep cool, but costs to produce might increase as well,” he says.

One surprising find is that the intensity of a heat spell is more impactful than its duration.

Researchers expected longer heat spells to degrade business performance more than shorter spells but discovered that length had no impact.

Professor Griffin says it is as if businesses are immune to this factor.

Paul Griffin image

Professor Paul Griffin.

“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,” he says.

Professor Lont says these results are possibly just the tip of the iceberg.

Heat spells are likely to become more frequent and intense, so affected businesses should prepare to adapt, disclose their mitigation plans and the impact on current and future profits.

“Better disclosure will help assess how serious a business is about managing the effects of extreme weather events. Treat inadequate disclosure as a red flag,” he says.

“Mandated regulation to limit greenwashing helps and provides guidance on the type of disclosure needed and helps business and investors price what may be a hidden risk, given the current paucity of disclosure.”

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