Spring and summer heat cuts sales and profits, especially in agriculture, construction, and transport.
Climate change is often discussed in terms of its impact on countries and economies. Yet its effects begin much closer to the ground: inside individual firms. Understanding how higher temperatures affect businesses, and how firms respond, is essential for designing effective climate adaptation policies.
In our recent Discussion Paper we provide new evidence from Slovakia, a highly industrialized, high-income economy. Combining data on the universe of Slovak firms with detailed weather records for 2013–2023, we show that higher temperatures already impose substantial costs on businesses, particularly during spring and summer.
The effects are far from uniform and are mainly driven by heat-sensitive industries, for example agriculture, construction, manufacturing, and transportation. Together, these industries account for around 40% of Slovakia's value added. A one-degree Celsius increase in summer temperature reduces sales by almost seven percentage points, revenues by more than six percentage points, and profits by nearly five percentage points.
Why does heat reduce firms' performance? The evidence suggests that the main channel is a decline in overall production efficiency rather than a fall in labour or capital productivity alone. High temperatures appear to disrupt the production process itself, making firms less efficient even when workers and equipment remain available.
How do firms cope? Surprisingly, they make little use of financial buffers such as cash reserves, bank borrowing, or additional investment. Instead, most firms respond by cutting costs. These findings suggest that many firms react to heat rather than preparing for it.
Looking ahead, the implications are worrying. Climate projections indicate that, under high-emission scenarios, firms will face increasingly large losses in sales and revenues. Without stronger adaptation measures, these effects could significantly weaken economic performance over time.
The policy message is clear. Climate adaptation should not focus solely on protecting households or public infrastructure. Governments also need policies that help firms become more resilient to rising temperatures. Better access to adaptation technologies, incentives to invest in heat-resilient production processes, and targeted support for the most exposed industries could substantially reduce the economic costs of climate change. Investing in adaptation today is likely to be far less costly than allowing firms to absorb growing productivity losses in the future.
© Vladimir Otrachshenko and Roman Vasil
Vladimir Otrachshenko is Senior Economist at the National Bank of Slovakia, Slovakia, and IZA@LISER Research Fellow
Roman Vasil is Head of Climate Sustainability and National Bank of Slovakia, Slovakia
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