As extreme heat becomes the new normal, how will it affect a location's capacity to attract investment?

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4 days ago

Any local will tell you that, if you can avoid it, August in Madrid is a no-go. It is so hot that you can feel the heat rising from the pavement and through your shoes. Many businesses will even shut down for the entire month as people flock back to their hometowns, the beach, or wherever they can keep cool. This year, that feeling arrived two months early, as the city experienced the hottest June on record.
This level of heat is not only a health hazard (Madrid experienced 108 heat-related deaths in June), it is also a chronic business risk – and yet, businesses are being drawn to Madrid like never before. The city has experienced significant growth in the past few years, with investments in early-stage startups growing by 18.5% from 2023 to 2024. Most recently, it was named the eighth top start-up ecosystem in Europe in Startup Genome's annual report.
A similar phenomenon was observed in the US by a 2024 study, where some of the fastest-growing cities in the country were also the most exposed to heat-related risks.
'Heat is an underrepresented risk, and it is maybe not something that is being factored in as much as increasing hurricanes or decreasing rainfall,' William Nichols, climate and resilience team lead at Verisk Maplecroft, tells Investment Monitor. 'We might argue that it is being disregarded.'
As the effects of climate change continue to disrupt society, companies will have to face how heat risks affect their operational continuity. Therefore, a location's exposure to heat-related risks will become an increasingly relevant factor as companies decide where to make their next investment.
While a few years ago the ESG (environmental, social and governance) paradigm encouraged companies to control their emissions, now it is the other way around, with companies forced to think about 'how the climate is impacting [them] in terms of [...] decision-making, planning, operational stability and continuity', Nichols says.
Understanding heat risks
Heat risks are harder to account for in climate risk scenarios because they represent a 'sort of widespread web of risks, rather than a direct risk', Nichols explains. However, higher than average temperatures can affect the availability of essential resources such as energy and water, as well as affect worker safety and productivity (particularly in industries that require outside work such as agriculture and construction).
Investors have typically focused more on the effects of acute risks such as hurricanes or wildfires. This is partially because the losses from these events are easier to measure than those that come from heat risks over time.
One of the main risks posed by extreme heat is a strain on energy resources. Power outages caused by heat are a prime example of how these risks can affect businesses. Scientist-led non-profit Climate Central published a report in 2024 that outlined how, in the US, there were 60% more heat-related power outages between 2014 and 2023 than in the previous ten-year period.
'Increasing heat impacts across the world have raised the demand for cooling, leading to increased energy usage,' Dr Radhika Khosla, associate professor of the Smith School of Enterprise and Environment at Oxford University, tells Investment Monitor. 'We have seen the impact of this in the UK, where, for instance, in 2023, a coal-fired power station was restarted to deal in part with energy demand from air conditioning.'
Energy demand is on the rise
The rise of energy-intensive digital infrastructure such as data centres, which require a lot of cooling, strains resources even further, yet a recent study by Verisk Maplecroft found that more than half of the world's top 100 data centre hubs are in locations highly exposed to heat-related risks. These hubs are mostly in North America in states with ample energy supply, such as Virginia or Texas. However, outside of the US, Asia is the region with the fastest growth rate.
Laura Schwartz, a co-author of the study and a senior analyst at Verisk Maplecroft, told Investment Monitor that South East Asia is a major subset of the growth in the region and 'that is absolutely key when you are looking at the issue of heat and tropical climates'.
'I heard in a clean tech industry forum in Singapore, 'this is the worst place to build data centres from a heat perspective', but it is not that they can't have data centres, they are needed everywhere,' Schwartz outlines.
Ultimately, the biggest driver for industry is cost, so even if a location has higher cooling requirements, if energy is cheap, as it is in South East Asia due to a heavy reliance on coal and fossil fuels, 'it is not a deal breaker', Schartz explains.
And yet, once these problems become evident, local governments have had to react. Singapore, for example, famously placed a moratorium on building new data centres from 2019 to 2022 due to their high energy demand. Recently, Texas passed a law that gives grid operators the power to disconnect data centres during a crisis and have them switch to backup generators.
In Singapore, friction between the high energy demands from data centres, complicated by a warm climate, has led to an increased interest in innovative cooling methods. In 2023, it launched the Sustainable Tropical Data Centre Testbed to enable scientists to experiment with more energy-efficient cooling methods that can adapt to tropical climates.
Fossil fuel dependence entrenches heat risks
Even if some businesses can insulate themselves from these risks, such as those with office workers that have access to air conditioning in some parts of the world, Khosla warns that 'global business is going to see impacts from extreme heat somewhere in their networks or supply chains'.
'The problems are most acute for businesses in developing countries that will often have least access while enduring the highest temperatures overall,' she says.
Higher energy demands, driven by more digital infrastructure and overall higher cooling requirements, risk entrenching a reliance on non-renewable energy sources to fill that supply gap.
'Arguably, the most important change we can make is to ensure we can cool ourselves sustainably and without making climate change even worse," Khosla concludes. "Until we remove fossil fuels from our energy grids, this vicious cycle of burning gas and coal to keep cool will remain."
"As extreme heat becomes the new normal, how will it affect a location's capacity to attract investment?" was originally created and published by Investment Monitor, a GlobalData owned brand.
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