Extreme heat poses a significant business risk

All across the world this summer, businesses have suffered due to the record-high temperatures. In China’s Sichuan province, all factories, including those owned by the likes of Apple and Intel, shut down for six days to save energy.

In Germany, boats carrying grain, coal, chemicals, and other materials struggled to navigate the Rhine River’s low water levels. And in the US, restaurants and breweries saw reduced foot traffic and small businesses were forced to cut outdoor workers’ hours to keep them safe.

Even the venerable touring circus Cirque de Soleil has had to adjust to the heat, Duncan Fisher, VP and general manager for its touring show division, told CFO Brew. It’s adjusted the schedules of the workers who set up its big top tents.

“We’ll start people early in the morning, like a 4 or 5 a.m. shift to be able to work when it’s cooler,” he said. The company also issued workers Camelbak water bottles to help them stay hydrated, and set up shade and mister tents for audience members waiting outside.

Companies need to plan ahead for extreme heat, Kathryn Kaminsky, vice chair and US trust solutions co-leader at PwC, told CFO Brew in an email. “Extreme weather events have become a new normal. This makes it essential that businesses fully include climate considerations into any risk management and overall strategy plans,” she said.

Planning for extreme heat and other climate-related events can be daunting, Kaminsky said. “It requires a deep dive into every aspect of a business and may be expensive and time-consuming,” she said.

Nevertheless, she said, “the benefits of taking these steps cannot be overstated…By identifying the aspects of operations most at risk by extreme heat, businesses can take the most effective action and suffer the fewest consequences—financial and otherwise.”

Know your heat risk. Kaminsky recommends that businesses build “a thorough risk model” to help them identify and address vulnerabilities. The model should be based on a “trusted financial model” that’s representative of a business’s strategy, structure, and risk drivers, she said. Companies can use it to determine which risks to retain, which to insure against, and which to change their business model to avoid.

The best way to prevent financial losses is to “model the effects” of extreme heat “long before a crisis occurs,” Kaminsky said.

But the model needs to take operational impacts into account as well. “Extreme heat can affect all aspects of operations, from workforce safety to supply-chain disruptions,” Kaminsky said. “Heat is pervasive and four walls, a roof, and air conditioning are not enough to reduce the number of consequences it can have for a business,” she added.

Use a risk profile to identify which of your personnel might be more at risk from heat, such as older people, those with health conditions, or those who work outdoors, Owen Miles, field CTO of Everbridge CTM Solutions, told CFO Brew.

Get granular. After assessing heat risk, companies should turn their findings into plans. Both Kaminsky and Miles advise making the heat plan as thorough as possible. It should be “hyperlocal,” even taking into account conditions in individual buildings, Miles said. Kaminksy pointed out that airlines consider the effects of heat on gates. Employees working outside at a gate can be at greater risk from heat, and gate conditions affect how much it costs to keep planes cool.

“While gates may not be the first thing that comes to mind when thinking about an airline’s operations, these are the types of nuanced and granular considerations that must be made to reduce risk as much as possible,” Kaminsky said.

Have a contingency plan. In some cases, heat may stop a business from functioning altogether. For instance, a power outage could shut down a store or restaurant, or supply-chain problems could keep a manufacturer from getting a critical part. These disruptions can affect customer loyalty, Miles said, noting that “customers vote with their feet and their wallets.”

Businesses should plan for such discontinuities. Miles suggests companies adopt a model like the Bank of England’s Operational Resilience Framework. That model rests on the concept of “important business services,” or what a company delivers to customers, he said. Companies should think about the processes needed to deliver those goods or services, Miles added, and whether they could be recovered in an acceptable amount of time.

However, contingency plans “can be a roadblock to recovery” if they’re not implemented correctly, Miles cautioned. Often, he said, teams estimate their recovery times in a siloed fashion, not realizing that those estimates rely on inputs from other teams who may have a different timeline in mind. “You need to get everyone recovering at the same rate,” Miles said.

To facilitate communication, he said, recovery plans should be digitized and delivered over a platform to the people who are responsible for executing it. They should be able to “press a button and everyone knows what to do,” he said.