Heat Alert: Assessing Heat Stress Risk Impacts with Moody’s Climate on Demand Pro

This summer, the Northern Hemisphere saw many temperature records broken.

July 2023 was named the hottest month on Earth since records began in 1880, and July 6 is potentially the hottest day on Earth in the last 120,000 years, as it becomes clear that heat waves are no longer isolated meteorological events.

The scorching summer of 2023 also ushered in more than soaring temperatures. The increasing frequency and severity of heat waves have resulted in business disruption, and significant financial losses, with the core heat risks all highly correlated – drought, water stress, heat stress, and wildfires.

Heat stress alone is placing an increasing strain on industrial operations, human health, and society. As a result, severe heat events are forcing a reshaping of the risk assessment and financial preparedness landscape.

Once described as ‘chronic risks’ due to the prolonged nature of severe heatwaves and water shortages, perils such as drought, water stress, and heat stress – all contributing to wildfire potential, now increasingly exhibit characteristics of acute risks.

A move from chronic to acute risk status underlines the urgency to understand the impact of severe heat events.

Addressing Heat Perils

How can risk managers start to address this growing issue?

To get a forward-looking assessment of physical climate risk and its associated financial impacts, the risk engine within Moody’s Climate on Demand solution is designed to provide analytics that quantify the costs and impacts (average annual damage and variability), for a wide range of perils covering heat stress, wildfires, tropical cyclones, coastal and inland floods, water stress and earthquake.

The impact of heat stress conditions on worker productivity is considered across a wide range of economic activities within the Climate on Demand solution.

The solution uses modeling which leverages state-of-the-art downscaled global climate model outputs, to evaluate the hazard in terms of wet bulb temperatures (WBT) and then projects how WBT is expected to evolve in a warming climate.

These WBT measures are widely used in leading occupational health and safety assessments to quantify heat strain, as they account for both the effects of high temperatures and humidity and their effects on human health and labor productivity.  

The solution also considers various factors that are known to affect labor productivity and the associated financial cost.

For example, the model makes assumptions for the types of workloads (e.g., heavy construction versus office desk work), the amount of protective clothing used, and workers' acclimatization to heat for each activity type (occupancy class) and geographical region.

These factors result in varying susceptibility to heat-related risks and associated impact on labor productivity. The Climate on Demand solution also recognizes that many businesses and individuals implement mitigation efforts such as shifting working hours towards the cooler times of the day, or through the provision and use of air conditioning, which ultimately reduces the impact of extreme heat on business interruption.

The Climate on Demand solution also incorporates the urban heat island (UHI) effect, which recognizes the impact of the thermal inertia of structures and of the altered land cover in urban surfaces, with impervious and dark surfaces contributing to UHIs due to less evaporative cooling from vegetation and increased retention of heat in human-built structures, among other exacerbating factors.

The UHI effect can generate substantial differences in temperatures between urban and rural areas, particularly in the evening as rural areas cool more rapidly, making it a critical model component for estimating heat-stress risks in urban areas.

A different approach is used for heat stress compared with most other perils in Climate on Demand Pro which uses a stochastic modeling framework.

An ensemble of the Atmosphere-Ocean General Circulation Model (AOGCM) output from the Coupled Model Intercomparison Project Phase 6 (CMIP6) is used directly to project future climate according to two so-called Shared Socioeconomic Pathways (SSPs) and Representative Concentration Pathways (RCPs).

The ‘Middle of the Road’ (SSP245) and the ‘Fossil-Fueled Development’ (SSP585) pathways represent moderate and extreme levels of climate change, respectively, based on different assumptions of future greenhouse gas emissions and mitigation strategies.

The AOGCM-SSP ensemble therefore captures two forms of climate change uncertainty: one associated with choices about climate model structure, and another caused by socioeconomic factors.

Forward-Looking Impact of Heat Stress

As the severity of heat stress impacts increases, impacts are compounded by increasing stress on power grids. In some cases, by the end of the century, heat stress could have greater financial impacts than present-day acute perils such as cyclones or floods.

A rail terminal located in Queensland, Australia, highlights just this phenomenon. Given a hypothetical US$1 million asset exposure, the losses from heat stress grow significantly towards the end of the century. Under RCP8.5 or the ‘Fossil-Fueled Development’ scenario, the losses even surpass those from cyclones.

Notably, heat stress standard deviation also surpasses that of hurricanes, meaning that the variation in the financial impact of heat stress year over year becomes much greater.

This is particularly interesting as acute events such as hurricanes and floods tend to cause very high impacts in terms of damage and business interruption when they happen but tend not to strike the same location every year.  

Heat stress has been historically thought of as a chronic risk expected to have less intra-annual impact variability. However, as we can see from this location, heat stress is expected to have a highly consequential and potentially highly variable impact later in the century. This high year-to-year variability should be incorporated within a risk manager’s planning.

While these trends are most prominent in the late century under the ‘Fossil-Fuel Development’ scenario, even moderate scenarios show a significant rise in heat stress impacts by the end of the century.

The example location above highlights the growing severity and the urgency to understand heat stress risks on portfolios, real assets, and across businesses. Companies and real asset portfolio managers can use Climate on Demand to identify their most at-risk facilities and consider building upgrades or even operational changes to ensure heat-related resilience.

Utilizing Climate on Demand to gain insights into the prospective financial repercussions of climate change offers a competitive edge. It also showcases a high level of market maturity and a resilient financial outlook for both shareholders and investors.

As this summer showed, record temperature records are now being broken with regularity, and without an understanding of the impacts of heat waves on assets moving into the future, shocks will occur.

Effective mitigation strategies now need to be evaluated, and solutions such as Climate on Demand are well-placed to give businesses the confidence to move forward.

Find out more about Climate on Demand Pro here.