Extreme heat is reshaping daily life, but what does it mean for companies? Assistant Professor Nora Pankratz joined the Executive Summary to unpack the financial toll of rising temperatures on organizations, and what — if anything— companies can do about it.
Extreme heat is reshaping daily life, but what does it mean for companies? Assistant Professor Nora Pankratz joined the Executive Summary to unpack the financial toll of rising temperatures on organizations, and what — if anything— companies can do about it.
Show notes
[0:00] The world is getting warmer, and it’s costing businesses.
[0:37] Meet Nora Pankratz, an assistant professor at the University of Toronto Mississauga, with a cross appointment to the Rotman School of Management. She studies the impact of climate change on organizations.
[1:48] One of the biggest risks of heat is its impact on production.
[3:06] What does “heat exposure” even mean?
[3:32] Heat – specifically days over 30 degrees Celsius – might be costing businesses an average of $650,000 per quarter.
[3:54] And it affects indoor and outdoor industries alike, albeit in slightly different ways.
[4:49] It also has an impact on investors…
[5:39] …and supplier relationships.
[7:39] How can businesses adapt?
[8:40] Importantly, no one can really study what businesses are doing, since they aren’t sharing, nor are they required to share, their heat mitigation strategies. As a result, we don’t know what works, and what doesn’t.
[9:17] Nora studied the impact of heat on worker safety, and the results weren’t great.
[10:38] What’s driving heat-related injuries?
[11:39] But a simple, low-cost heat-mitigation strategy – training to identify signs of heat stroke – had a huge impact.
[12:35] So are businesses doing anything? Well…maybe?
[13:46] Nora is hopeful: “Overall, I think over the last couple of years, there has been an uptake in this type of data and analytical work at the firm level. So, I think firms will explore this more and more going forward.”
Megan Haynes: The world is, objectively, getting warmer. In 2024, Canada experienced more heat waves than the previous year, with climate change making them more likely to be severe or extreme. July 22, 2024 was declared to be the hottest day on record globally.
Over the past year, 10 countries reported at least one day of 50 degree Celsius or higher.
We know extreme heat can lead to costly, destructive and devastating wildfires. It can cause a spike in heat-related illness. It can run water sources dry. In the US, heat is likely costing businesses 100 billion annually.
Nora Pankratz: Rather than any moral responsibilities or social responsibility, focus for firms should indeed be fiduciary duty. So to the extent that they owe their shareholders a sound financial management, it is really important to consider these risks as they seem to be financially material, and there should be a self interest of firms in better adapting to these types of hazards, just for the sake of their shareholders.
My name is Nora Pankratz. I'm an assistant professor of finance at the University of Toronto, and I research corporate finance with a focus on the potential effects of climate change on firms and financial markets.
MH: Nora has specifically been studying the impact of extreme heat on companies’ financial success, and the signs are worrying.
Businesses aren’t unaware of this. One survey found that 56 per cent of company leaders in Canada are concerned about the impact extreme weather on their overall profitability. But how worried do they need to be? And importantly, what can leaders do about the risks of rising temperature?
Welcome to the Executive Summary. I’m Megan Haynes, editor of the Rotman Insights Hub.
Musical introduction
MH: We know heat, particularly, has a pretty profound impact on the overall environment. But what does it do to a company? A lot of the risks come down to productivity.
NP: When I started to work I had seen experiments on how heat affects our productivity that were conducted in the lab. So in these experiments, the researchers essentially heated up a room and then measured how these different conditions affect task performance. They found that, as humans, our highest productivity, if we think about our work in office environments, around 22 degrees Celsius. But then they found that the task performance starts to decrease with temperatures above 23 to 24 degrees and that they are pretty sharp drops in performance when we reach temperatures of about 30 degrees Celsius. For temperatures over 30 degrees Celsius and the performance drops by about 10 per cent keeping everything else equal. So I found this result really fascinating, and then ask myself the question, okay, so if heat is bad for individual performance, can we also capture that at the firm level?
MH: To study this, Nora gathered performance and stock return data of about 17,000 firms across 93 countries measured against local temperatures, and specifically looked at how temps over 30 degrees Celsius affected overall performance and returns.
NP: We find that, on average, an additional day of heat exposure significantly reduces both revenues and operating income.
MH: Let’s pause to contextualize what, in Nora’s research, heat exposure means: It’s essentially any day that tops 30 degrees Celsius, regardless of whether that’s typical or atypical for a region. This is important, because Nora found that any day that tops 30 degrees has a statistically significant negative effect on firms
NP: For revenues, we have this estimate of decline of 8.4 per cent of an average day’s worth of revenues.
MH: Daily Operating income – the normalized firm profits less recurring expenses – saw a whopping 26.1 per cent drop when compared to the average day when temps weren’t above 30 degrees.
The drop of both revenue and operating income meant the organizational average saw a loss of $650,000 per quarter, which can more strongly hit certain types of industries
NP: We find stronger effects for firms with higher shares of work outdoors, and we find larger effects on operating income compared to revenues, which isn't ultimate proof, but consistent with the idea that heat both slows down production and provision of services
MH: That’s not to say largely indoor industries – think factory work, knowledge companies, healthcare, etc. – are unaffected. These companies tend to take a bigger hit to their operating income as they pay for AC to cool their workers down. Companies that operate in largely outdoor environments – think construction, drilling, mining – in comparison are likely to feel a greater hit to their productivity. And that hit to profit and operating cost doesn’t just stop at the balance books. It has a pretty wide-ranging impact...and not just on one company’s bottom line.
Musical interlude
MH: The first trickle effect of this extreme heat is actually on investors.
NP: We find that when firms were exposed to prolonged periods of heat relative to what is normal for this respective firm, investors are more negatively surprised by their performance.
MH: This likely means investors aren’t using temperature data – a widely available piece of information – when speculating on a company’s performance.
NP: And this observation would be unlikely if investors tracked firms heat exposure and adjusted their expectations based on that before the earnings announcement, which we would expect based on the hypothesis that markets are efficient, that information is incorporated as soon as it becomes available. So to some extent, this is a little bit of a puzzle of why investors leave the option on the table of incorporating this information before the earnings of the company are revealed at large.
MH: So, investors should take note of local weather patterns. Heat also has a pretty profound impact on supplier/client relationships, which Nora studied in a second paper released in 2024. Similar to the first study, Nora looked at about 5,500 suppliers and 8,000 customers across 70 countries and measured them against local temperatures as well as other meteorological events, like floods.
NP: Climate related shocks seem to propagate. What I mean by that is that if suppliers are exposed to floods and heat, we do find that naturally, their own performance decreases, but also that we see drops in a financial performance of customer firms that are located in different parts of the world. In other words, there seems to be this trickle down effect that leads to a distribution of the damages from the directly affected firms to the customers in their supply chain network,
MH: It makes sense: suppliers pass along costs to their clients, so if things like floods or extreme heat drive up those costs, that will likely be reflected in what they’re charging their networks.
Clients’ other productions are also sensitive to missed deliverables. If a lithium mine in Bolivia experiences a heat wave, and subsequently sees a decline in production, then battery manufacturers relying on that lithium have to adjust their outputs as well. As a result….
NP: The second finding is that suppliers are more likely to lose their customers when these customers perceive that the exposure of the suppliers to heat and floods has Increased above and beyond what they expected at the start of the supply chain relationship.
MH: Businesses, generally, expect some disruption to their supply chain as a result of weather. However, Nora’s research found that if a supplier experiences more extreme heat than what they have historically– i.e. the supplier has more hot days than the year before - then the client is 7.4 per cent more likely to drop them from their supplier list. For unexpectedly high exposures – say more heatwaves than previous years – clients are 6 to 10 per cent more likely to replace the supplier with one from an area less exposed to extreme heat. That might be great news for businesses in Scotland, but terrible news for suppliers based in Brazil. So what can companies do to adapt to this heat risk?
NP: Resilience is likely to become a bigger topic connected to the hazards imposed by climate change. So when suppliers become less reliable, firms might indeed have to consider multi sourcing. But there might also be other strategies, such as looking for suppliers in less risky locations, or measures such as planning more space for larger inventories, or just increasing lead times and just in time production but for all of these measures, we would expect that these are likely to be quite costly.
MH: Companies – particularly those suppliers that are at bigger risks of losing clients, can also explore heat mitigation strategies.
NP: So there are technologies and strategies available to firms that range from very costly to quite affordable, starting with, say, relocating assets and establishments, installing air conditioning, so all on the relatively expensive side. But then the more affordable options might also include rescheduling work hours, around temperature peaks and implementing protective protocols for workers. Those are options that are relatively less costly and might be quite effective. However, for all of these investments and strategies, the problem is that they're inherently private and difficult to observe, both for researchers, but also for investors.
MH: This lack of transparency is problematic. While hits to the bottom line are difficult, it’s important to remember that at the heart of these financial losses are the workers, who are likely to be most harmed by extreme heat.
And if you and others can’t track your investment in heat mitigation, how do you know if it’s working?
Musical interlude
MH: The final study in Nora’s heat trilogy looks at how extreme heat affects worker safety. She and colleagues looked at 16 million workplace injuries in California against local temperatures over a 20 year period.
NP: Using this data, we find that heat increases the risk of workers getting injured on the job by about 7.7 per cent on a hot day, quantified as a hot day, over 85 degree Fahrenheit, relative to colder temperatures.
MH: For Canadian listeners, 85 Fahrenheit is roughly 30 degrees Celsius. And for days topping 100 degrees Fahrenheit or 37 degrees Celsius – workplace injuries increased 10 to 15 per cent. And, interestingly, this rise in accidents holds true regardless of whether the firm operates largely indoors or outdoors.
NP: We were to some extent surprised how consistent these effects are across all industry groups. So for example, we do find that the effects are the largest in, I would say the usual suspects, industries such as agriculture, mining, utilities, construction, where a lot of workers, or large share of workers, is indeed outdoors. However, we also do find significant effects in manufacturing. And wholesale and retail in transportation, even in IT, finance and real estate and in entertainment, recreation. So really, across a whole spectrum of industries, where it is very likely that not all of these injuries just come from work outdoors
MH: So what’s driving these injuries? Well, there’s an obvious increase in heat-related illnesses. But Nora observed more than just a rise in heat stroke.
NP: When the body reallocates energy to keeping the body cool, this also leads to impaired cognitive performance, and this can be really detrimental for workers that operate in really risky professions, or that, for example, operate heavy machinery, work at heights where even A minor decrease in focus can be really tragic.
MH: So while the researchers noticed that yes, heat-labelled illnesses ballooned, they also noted that all other types of workplace injuries grew on days with temps exceeding 30 degrees.
NP: It is really tough to correctly attribute these injuries to heat, as in, if a worker goes to the doctor or to the hospital with a broken bone, it's very unlikely that that is going to get recorded in the files in any shape or form. But then we also see the same effects and injuries that are not labeled in as heat illness, and this category of injuries is much larger, and the effects are very large, essentially attributable to this second effect of impaired cognitive performance.
MH: The good news, according to Nora’s findings, is that after California mandated that employers train employees and supervisors on the risks of heat in 2006, businesses saw 1,800 fewer heat-related injuries per year. Considering each on-the-job accident costs businesses an average of $120,000 when factoring in compensation, time off, etc – that’s a not insignificant potential savings. And that’s with some pretty minor climate adaptive strategies in place – we’re really just talking about some basic safety training.
Other heat mitigation strategies that Nora mentioned before – say increased investment in cooling, off-peak shifts, etc. – are also likely effective at decreasing workplace injury. But we don’t really have the data to support that finding, at this time.
So extreme heat drives up operating costs, dampens revenue, shocks investors, strains supplier relationships and can increase worker accidents. Are businesses responding…the short answer is… maybe?
As Nora mentioned earlier, companies aren’t required to report on their heat-mitigation strategies, and most investors aren’t tracking firm performance against extreme heat, so there isn’t exactly much oversight over what companies are doing to protect their workers or profits against rising temperatures.
But Nora hopes that companies don’t underestimate the extreme damage it might cause.
NP: So I think for heat, there is a high probability that, because heat events are relatively less visible or salient, firms might underestimate the effect that these events have on their bottom line. There could be cultural, historical reasons why our understanding of how damaging heat is is not that pronounced. So, for example, the discomfort that is caused by heat is often understood as something that we can simply pull through or compensate with motivation.
If we think about what does it mean going forward for climate change, it's a little more difficult to say that more extreme days will necessarily also lead to more damage. I think that's one fair possibility, and it's important to have in mind that these extreme temperatures are likely to be realized much more often. But at the same time, the part that we really know less about is firm's potential to adapt and the cost of adaptation that could factor into the damage going forward as well.
Overall, I think over the last couple of years, there has been an uptake in this type of data and analytical work at the firm level. So I think firms will explore this more and more going forward.
Musical outro
MH: This has been Rotman Executive Summary, a podcast bringing you the latest insights and innovative thinking from Canada's leading business school. Special thanks to assistant professor Nora Pankratz. Join us next month as we chat with professor Dan Trefler why it’s so hard to regulate AI, but why we might be hurting ourselves long-term if we don’t.
This episode was written and produced by Megan Haynes. It was recorded by Dan Mazzotta, and edited by Avery Moore Kloss. For more innovative thinking, head over to the Rotman Insights Hub, and subscribe to this podcast on Spotify, Apple or Amazon. Thanks for tuning in.