As the world continues a 14-month streak of recording the hottest months on record, chronic heat is emerging as a physical climate risk widely affecting companies and governments alike.[1] Combined with high levels of humidity,[2] chronic heat is causing stress on workers and driving the need for adaptations to existing working conditions, particularly for outdoor labor.[3]
Across asset classes ranging from equities to real assets, investors exposed to industries dependent on outdoor-labor productivity (e.g., construction, agriculture, tourism) will need to navigate their portfolio holdings’ management of worker safety and labor productivity.
For investors looking to assess the exposure of their holdings to heat-related risks, it helps to see how the risk is broken down at various levels including country, sector and company. Perhaps the level that can provide the most insights, however, is at the asset level.
Heat-related risks in the US — an increasing trend in severity and potential costs
Applying this asset-level geographic approach to companies’ asset locations in the U.S. (as shown in the first exhibit), we note that even in a 2°C warming scenario, extreme heat shows a distinct increasing trend compared to other physical hazards.[4] From a potential costs perspective, the U.S. constituents of the MSCI ACWI Investable Market Index (IMI) could see the present value of extreme-heat-related costs increase from USD 370 billion[5] in a 2°C warming scenario to USD 770 billion in a 3°C warming scenario, accounting for over half (53%) of all costs related to physical hazards.[6]
Extreme heat shows a distinct trend relative to other hazards
Present value of costs related to physical hazards in the US
Workers and regulators have started to recognize the increased risks and to demand action. Multiple U.S. labor unions organized nationally around “heat week,” while the Occupational Safety and Health Administration in July 2024 proposed an initial set of heat-protection regulation for workers.[7] The proposed regulation includes two heat-index thresholds of 80°F (26.7°C) and 90°F (32.2°C) that start with requiring access to drinking water, rest breaks and acclimatizing new workers with gradually increasing workloads, to mandatory 15-minute breaks and monitoring for heat-related illnesses.[8] But temperature is just one part of the picture. Layering other factors such as humidity, wind speed, cloud cover and solar radiation means that labor productivity may start being affected for heavy physical labor at a daily maximum outdoor temperature of just 77°F (25°C).[9], [10]
Asset-level insights of hotel resorts show widespread heat risks
In addition to planning for the labor side of risks related to extreme heat, certain assets like hotel resorts may also see a direct impact on consumer demand. Resorts that capitalize on winter activities may see shorter profitable seasons, while higher temperatures may lead to harmful second-order effects like disruptions to rail and air travel,[11] or in some cases, rising water temperatures above safe levels for swimming.[12]
We looked at a selection of 81 hotel resorts in the U.S. owned by constituents of the MSCI ACWI Index, to see how regional variations in risk exposure emerged. On average, these locations would see a 16-day increase in days above where the maximum outdoor WBGT exceeds 25°C under a 3°C warming scenario. While every corner of the U.S. is expected to see an increase in heat-exceedance days by 2050, the highest increases are projected to be observed for resorts in Hawaii, across the southeastern U.S. and over much of the eastern half of the U.S. However, in areas like the Great Lakes (e.g., Michigan, Minnesota, Wisconsin), Pacific-Northwest (e.g., Washington and Oregon) and surrounding the Rocky Mountains (e.g., Colorado and Utah) where temperatures are currently more moderate and the effects of humidity less pronounced than in other parts of the U.S., a case could be made that over time they could benefit from a longer summer season — some Scandinavian cities have recently seen new peaks of tourism during hotter summer months.[13]
Leveraging geospatial intelligence gives investors the tools to engage
While initiatives like COP 27’s Sharm El-Sheikh Adaptation Agenda and legislation like the EU Corporate Sustainability Reporting Directive aim to increase company disclosure on physical climate risks, investors need not wait to assess their investments.[14] Comparing the hazard exposure of assets across current and future warming scenarios can give investors an immediate (high exposure currently) and long-term (largest change in risk exposure over time, or crossing a specific threshold) physical-risk profile.
This understanding of risk can empower investors to ask companies what potential adaptation measures, ranging from risk-transfer mechanisms (i.e., insurance), risk-reduction measures (e.g., adopting new technologies or processes or even changing locations of operations) or diversification strategies may be most appropriate.