‘Trillion-dollar question.’ How extreme heat is shifting corporate bottom lines

Extreme heat has gone from a seasonal anomaly to a permanent corporate variable. In North America, severe heat waves now occur twice as frequently as they did in the mid-20th century – a rate accelerating even faster across Europe and Latin America.

As record-breaking summer temperatures regularly cause regional infrastructure to buckle, the macroeconomic toll is mounting. Yet that climate burden isn’t felt evenly. While intense heat disrupts operations for a variety of industries, it also creates business opportunities for others.

Wall Street is now having to devote more resources to pinpointing those winners and losers, though it remains a complex task.

“This is the trillion-dollar question,” says Gernot Wagner, a climate economist at Columbia Business School. Part of that challenge is that “science in many ways is following reality,” he notes. It still takes considerable time for investors to translate evolving climate models into hard equity analysis.

But every heat wave provides more insight into how higher temperatures affect corporate bottom lines. Here are some of the industries that have already seen heat-induced opportunities and risks.

More grid equipment sales

When extreme heat spikes air conditioning demand, it triggers an immediate physical toll on regional electrical grids, causing equipment to degrade or even malfunction.

That vulnerability is particularly acute across North America and Europe, where much of the power network was built decades ago for a significantly cooler climate.

This is accelerating capital expenditures on grid infrastructure. In New York City – where days exceeding 35 deg C are projected to quadruple by 2030 – the local utility Con Edison allocated US$3.9 billion (S$5 billion) ahead of the summer to replace legacy infrastructure.

For manufacturers of substation transformers, cables and grid-scale battery storage systems, as well as engineering and maintenance firms such as MasTec, these investments represent a massive growth opportunity, says Andrew John Stevenson, an analyst at Bloomberg Intelligence.

That includes planned upgrades and emergency work in response to bad weather, according to Stevenson. Extreme heat frequently overloads distribution networks, fuelling demand for premium services whenever grid failures occur, he says.

For instance, when a severe heat wave in 2006 triggered widespread transformer failures across California and left more than 1 million people in the dark, it forced local utility Pacific Gas and Electric to replace malfunctioning equipment immediately. That crisis, in turn, generated millions of dollars in revenue for grid equipment suppliers and repair companies contracted to restore the system, according to a regulatory filing.

While not every heat wave knocks out power grids, equipment manufacturers and installers are well-positioned to capture “upside surprises” as extreme weather events continue to occur and make emergency repairs more likely, Stevenson says.

Advanced cooling is a hot business

The global buildout of data centres to support artificial intelligence has made hardware cooling a paramount operational challenge. Rising ambient temperatures are pushing standard HVAC (heating, ventilation and air conditioning) systems to their thermal limits.

In 2022, unprecedented heat waves in London completely overwhelmed the cooling infrastructure at both Google and Oracle facilities, forcing operators to execute emergency shutdowns of several servers to prevent catastrophic hardware damage.

But for companies offering advanced liquid cooling and specialised HVAC systems, this presents an opportunity.

“The AI-specific demand is migrating away from traditional air cooling,” says Garvin Jabusch, chief investment officer at Green Alpha Advisors. Alongside that hardware shift is a greater appetite for software that manages and optimises data centre cooling, he adds.

Carrier Global, whose product offerings include direct-to-chip cooling, told investors in April that a wave of new orders from the first quarter had helped generate enough transactions to fulfil its data centre sales target for the entire year. Similarly, Trane Technologies and Johnson Controls have also attributed their recent revenue growth in large part to data centres with increasingly complex cooling needs.

Trucking feels the heat

Data centres aren’t the only ones revamping their cooling systems. Trucking companies, which have historically done without in-cab air conditioning, are now adding it.

Take UPS, for example. Following a high-profile strike threat in 2023, the logistics titan codified a labour agreement to purchase only AC-equipped delivery vehicles, while retrofitting thousands of existing trucks operating in the hottest American corridors.

Meanwhile, regulators are stepping up heat protections. In India, the Ministry of Road Transport and Highways recently mandated air-conditioned cabins for all new medium- and heavy-duty trucks, reshaping an industry where less than 5 per cent of fleets have air conditioning.

While critical for workplace safety, these changes also drive up the operating costs of logistics companies – and not just through fleet overhauls. Running the AC all day eats up a large amount of fuel, even when trucks aren’t moving.

Higher temperatures raise builder costs

Not every industry can shield its employees from heat waves with ACs. Countries such as China and Spain have passed laws that halt outdoor jobs when temperatures reach dangerous levels. While the US lacks such mandatory requirements, it’s not uncommon for construction workers there to take more breaks on a particularly hot day, according to Stevenson.

Reduced working hours, coupled with impaired productivity under high temperatures, contributed to a US$38 billion economic loss in the US construction industry from 2001 to 2023, according to a report published last year by Duke University. Bloomberg Intelligence estimates that when temperatures escalate from 32.2 deg C to 37.8 deg C, construction firms face an average 5.7 per cent increase in labour costs.

“This is actually a very conservative number,” says Stevenson, who authored the research. “If you can’t work 20 per cent or 30 per cent of a day, there’s not just the labour that’s waiting around; there’s all the capital that’s waiting around,” he notes. In an environment of persistent extreme heat, “it’s a material amount of loss on a rolling basis.” BLOOMBERG