Allianz Trade: How is Extreme Heat Damaging Businesses?

Extreme heat is becoming an increasingly significant sustainability challenge with economic, social and environmental consequences. 

According to Allianz Trade’s Report, ‘Too hot to grow, The economic costs of extreme heat’, heat stress events have increased sevenfold since the 1980s, while the average number of deaths per event has risen fivefold. 

As climate change accelerates global warming, countries are facing rising energy demand, declining productivity and increased pressure on infrastructure and public finances. 

Climate change and the escalating heat crisis

According to the report, climate change is driving more frequent, intense and longer-lasting heatwaves across the world. 

Between 1980 and 1989, only 14 heat-wave events were recorded globally, compared with 99 events during the 2020 to 2024 period alone. 

The average death toll per event increased from 244 people in the 1980s to 1,222 people in recent years, indicating that societies are struggling to adapt to rising temperatures. 

Data shows that Europe has emerged as one of the most vulnerable regions due to ageing populations, dense urban environments and limited cooling infrastructure. 

“Following the multi-actor frame of IPCC, closing the gap in Europe requires coordinated action on four fronts: labour regulation, buildings, public finance and households,” writes Jade Elisabeth, Climate Economics Research Assistant at Allianz Investment Management, in the report.

“A workable occupational regime needs binding temperature thresholds, automatic work restrictions when those thresholds are crossed, paid compensation for lost hours and coverage that reaches fixed-term, seasonal and platform workers. 

“No major European economy has all four and the gap is concentrated on the last: protections were designed around standard contracts and leave the workers most exposed to heat largely outside the regime.”

The report highlights that heatwaves already reduces European GDP during exceptionally hot years and could cause significantly larger economic losses in the future if mitigation and adaptation efforts remain insufficient.

“Extreme heat is emerging as a structural economic risk, with Europe highly exposed. Heat stress events have multiplied sevenfold since the 1980s while the average death toll per event has risen fivefold,” writes Hazem Krichene, Senior Climate Economist at Allianz Trade, in the report.

“That share partly reflects measurement: vital registration and excess-mortality surveillance are far more developed in Europe than in much of Africa and South Asia, where heat deaths go largely uncounted.”

Energy systems and global warming

Global warming is placing a vast amount of stress on energy systems by increasing cooling demand while simultaneously reducing the efficiency of energy generation and transmission. 

The report identifies a critical temperature threshold around 30°C, beyond which energy consumption rises sharply as cooling needs increase. 

At 35°C, a marginal increase in heat stress is associated with a 1.2% rise in per-capita energy consumption, compared with a decline at lower temperatures. 

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The report states that many European power plants depend on thermoelectric technologies that require water and efficient cooling systems, making them vulnerable during extreme heat events. 

“The economic transmission of heat stress is non-linear, with a critical threshold around 30°C beyond which productivity losses intensify sharply,” says Bjoern Griesbach, Head of Macroeconomic & Capital Markets Research at Allianz Trade, in the report.

“Below this level, warming reduces heating costs and is associated with modest productivity gains. Above this level, the relationship reverses and both channels worsen with each additional degree. 

“The dominant effect operates through labor: output per hour declines for every degree across the 30-35°C range. 

“Wage adjustments follow productivity with a lag, so the short-run cost falls disproportionately on firm profitability before gradually transmitting to household income and consumption.” 

At the same time, transmission networks, generators and solar photovoltaic systems experience performance reductions under high temperatures, according to Allianz's data.

Supply chains and infrastructure resilience

Extreme heat can also affect supply chains, disrupting critical infrastructure that supports the movement of goods, services and energy. 

The report notes that heat can weaken transport systems through softened road surfaces and thermal expansion of rail tracks, leading to operational delays and service interruptions. 

During periods of extreme heat, electricity grids can also become strained as demand rises while generation capacity is constrained. 

Such disruptions create bottlenecks that ripple throughout supply chains and reduce overall economic efficiency. 

“To gauge the macroeconomic stakes, we construct a stress scenario in which the five hottest years observed in each country between 2014 and 2024 are replayed in ascending order over 2026 to 2030, the fifth-hottest year in 2026, the fourth in 2027 and so on, culminating in the country‘s hottest year on record in 2030,” says Jasmin Gröschl, Senior Economist for Europe at Allianz Trade, in the report.

“Under this trajectory, cumulative implied GDP losses (2026 – 2030) could reach 5–7% for the most exposed economies: US$240bn for France, US$354bn for Japan, US$147bn for Italy, US$131bn for Germany and US$120bn for Spain.”

The study also emphasises that infrastructure systems were often designed for cooler climate conditions and are increasingly being pushed beyond their operational limits. 

Business implications of heat stress

Businesses and public finances are also facing growing risks as extreme heat reduces productivity and increases operating costs. 

“Most heat damage accumulates through excess mortality, lost working hours, healthcare-system pressure and infrastructure stress – channels that indemnity contracts are not designed to handle,” writes Katharina Utermoehl, Head of Thematic and Policy Research at Allianz Trade, in the report.

“This makes extreme heat harder to insure than other climate risks because losses are widespread and are often indirect – like lower productivity or health impacts – making them difficult to measure and price.”

The report finds that output per hour declines by approximately US$1.30 for every degree above the 30°C threshold, while energy costs increase simultaneously. 

Over time, lower wages, weaker consumption and reduced investment can be expected to create broader economic challenges, with some countries projected to experience cumulative GDP losses of 5–7% between 2026 and 2030 under sustained extreme heat conditions. 

Governments also face declining tax revenues alongside higher spending on healthcare, energy support, infrastructure repairs and climate adaptation. 

These findings highlight the importance of sustainable investment, adaptation finance and long-term business planning to strengthen resilience against the economic impacts of climate change.