McKinsey Global Institute: Climate planning has prioritized floods. Heat demands equal attention

Floods got the headlines but heat is quietly growing into a $700 billion problem to be solved — and only 18% of exposed people have AC.

Summer in the Northern Hemisphere has gotten off to a very hot start. Europe has baked under record-breaking temperatures, while a “heat dome” blankets much of the United States. Many countries have reported heat-related deaths, roads melted in Germany, and utilities in the United States are asking customers to set their air conditioning at higher temperatures and adding crews to cope with outages as demand for cooling soared. 

This has focused attention on the impacts of heat on health, infrastructure, and economic productivity—and how to best manage them. That is a good thing. While past discourse on adaptation has often focused on the impacts of severe flooding, our recent McKinsey Global Institute report on climate adaptation found that heat is likely to affect far more people and account for a larger share of adaptation costs.

Though air conditioning has dominated conversation of late, the heat adaptation toolkit is far broader, including other active cooling measures like fans and cooling shelters as well as passive ones like better designed buildings and infrastructure, reflective roofs, and urban trees, along with weather forecasts and early warning systems. While it is important to note that the effectiveness of some of these measures is limited and they cannot protect against every form of heat impact, investments in heat adaptation can deliver attractive benefits. Every dollar invested in heat protection today can avoid $3 to $5 in damages—not a bad return on investment.

Of course, adaptation is needed to protect against more than just heat. Drawing on geospatial analysis of four hazards—heat, drought, wildfires, and flooding—and 20 tried-and-true adaptation measures, we estimate that today’s global adaptation spending of roughly $190 billion a year protects 1.2 billion people, leaving roughly three billion people with limited protection. For example, only 18% of people living in places exposed to heat stress today have access to air-conditioning. Extending protection to all 4.1 billion people exposed to these hazards would cost $540 billion annually, roughly three times current spending.

At 2°C of warming above preindustrial levels, which the world is expected to reach by around 2050 on its current emissions trajectory, an additional 2.2 billion people may be exposed to heat stress, far more than the increases projected for drought or flooding. Protecting against all hazards would require about $1.2 trillion annually—and almost three-fifths of that spending would go toward just heat adaptation.

Managing climate risks is increasingly a priority for businesses, as more severe impacts affect their workforces, supply chains, and physical facilities. Our analysis suggests that more than half of the total adaptation cost at 2°C would fall to private actors, individuals, of course, but also companies.

No business makes its adaptation decisions in a vacuum. Businesses operating in cities with a heat-action plan, resilient building standards, or government-built cooling shelters face a different calculus than those without such protections. But companies can also play a more direct role in adaptation. Investments in air conditioning and temporary cooling shelters protect lives during periods of debilitating heat and humidity and also sustain output in factories, warehouses, offices, and service floors. Viewed this way, adaptation is not merely risk management, it is a strategic and operational imperative.

The good news is that many companies already take adaptive actions without calling them such, designing facilities to withstand extreme weather events, building inventory buffers against supply chain shocks, and installing backup power to stay online through storms.

However, today’s corporate adaptation often focuses on direct operations rather than supply chains, distribution networks, and communities where companies operate. Nor are these efforts typically designed for the full range of hazards, recalibrated as risks intensify, or embedded into forward-looking capital planning. Approached deliberately, adaptation can safeguard assets, reduce insurance costs, strengthen brand resilience, and create competitive advantages.

Companies choosing to act have a wide range of options. First, they can directly protect their assets with on-site defenses like enhanced cooling systems, firebreaks, and microgrids, or by strategically locating new assets where risks are lower. For example, telecommunication companies are elevating equipment above flood lines and equipping cell sites with backup batteries to ensure continuous operation during and after major storms.

Second, companies can look beyond their own operations and strengthen resilience across supply chains, distribution networks, and their customers, employees, and communities. Examples range from financing community cooling centers and supporting ecosystem restoration to helping smallholder farmers in supply chains adopt practices such as crop diversification and rainwater storage that build resilience to drought.

Third, adaptation can also create business opportunities. Companies with expertise in resilient infrastructure, adaptation technologies, or innovative financing can create value while helping reduce adaptation costs. For example, providers of roofing and waterproofing systems, and heat-protective wearables that make people and buildings withstand heat and water damage stand to benefit from growing demand.

The world continues to underinvest in heat adaptation and climate resilience more broadly. Companies that lead on adaptation can not only protect their bottom lines but also contribute to a more stable and resilient economy.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

Sylvain Johansson is a senior parter at McKinsey & Company and a director of the McKinsey Global Institute.

Mekala Krishnan is a partner at the McKinsey Global Institute.

Kanmani Chockalingam and Annabel Farr are McKinsey Global Institute senior fellows.

This story was originally featured on Fortune.com