Stock portfolios face an annual $3.9 trillion heat tax

Your stock portfolio, the core of your wealth and retirement security, is being reduced every year by a secret 2% tax, one you didn’t vote for and won’t find disclosed in any prospectus. And it will only get bigger as the planet gets hotter.

Extreme heat saps the productivity of the planet’s labor force by 2%, enough to cut global gross domestic product by 2%, or $3.9 trillion a year, according to a new study by analysts at the market-research firm MSCI Inc. The effect doesn’t hit every part of the economy equally; construction workers suffer from heat much more than, say, bankers.

But each sector takes at least a little hit, the total of which will grow to 2.5% of GDP in the long term, even under relatively sanguine carbon-emissions scenarios,(1)MSCI warned. Given the world’s current trend of backtracking on climate progress, those losses could end up being more like 3.3%, or $6.5 trillion.(2) Every year.  

Of the 2,414 companies in MSCI’s All Country World Index (ACWI), 81% are suffering heat effects when the planet is still only 1.4 degrees Celsius (2.52 Fahrenheit) hotter than preindustrial averages, the study estimated. The ACWI represents about 85% of the global public stock market, so the odds are pretty good that your portfolio is feeling some of this pain. The report estimates that losses exceed 5% of revenue for some companies.

Workers can become acclimatized to heat, which helps recoup about 17% of productivity losses, according to the study. But that can only go so far, especially as the planet isn’t heating in a steady, predictable line. Heat waves like the one that hit Europe this summer test even the most seasoned workers and can push productivity losses much higher, to 5% in extreme cases. Such events are now about four times likelier to occur than they were before we burned enough fossil fuels to ravage the climate, by MSCI’s measure. At 2C (3.6F) of warming, our current trajectory, heat waves will be 5.6 times likelier. 

Hotter workers have a harder time building data centers, delivering packages and smelting iron. But only 60% of ACWI companies report taking any measures to deal with heat, according to MSCI. And 45% of those efforts are limited to “monitoring and assessment.” Admitting you have a problem is the first step to recovery, but it’s not nearly as effective at fighting heat as time in the shade. 

Air conditioning, mandatory water breaks and the like cost companies money and time. But investing in adaptation not only keeps people working safely, it can help businesses stand out to investors as heat’s effects become increasingly harder to ignore, year after sweltering year. 

MSCI’s numbers measure only the labor productivity losses of extreme heat. They don’t include how high temperatures damage crops and critical infrastructure and contribute to drought that makes it harder to generate and deliver electricity. They don’t include the medical costs of heat, which worsens everything from heart disease to mental health.

Nor do these numbers include the health impacts of wildfire smoke, which already amount to $244 billion each year in the US alone, according to a 2024 study published by the National Bureau of Economic Research. They don’t include the losses created by other turbocharged natural disasters, which gouged $7.25 trillion from the US economy in the past decade, Bloomberg Intelligence has estimated.

We could go on. All told, according to a 2024 NBER study, updated this year, by economists from Stanford and Northwestern universities, the global economy will shrink 20% for each 1C hotter the planet gets. That’s $39 trillion a year for each degree of heating, using MSCI’s baseline of 2025 global GDP based on purchasing-power parity.  

For a long time many of us were conditioned to think of climate change as a thing that would happen in the future, and mostly to other people. But the climate has already changed, its chaos reaching places once considered safe, from northern Canada to Asheville, North Carolina. The global economy and, by extension, your investments need climate-proofing, too. 

More From Bloomberg Opinion:

• The Economic Shock That’s Almost Too Hot to Handle: Daniel Moss

• Fossil Fuels Are Winning the Easy Money Battle: David Fickling

• Heat Is Melting Our Grip on Climate Reality: Lara Williams

(1) Specifically, Shared Socioeconomic Pathway 2-4.5, which is something like a “middle of the road” scenario for future emissions.

(2) Based on SSP5-8.5, or a high-emissions scenario.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Mark Gongloff is a Bloomberg Opinion editor and columnist covering climate change. He previously worked for Fortune.com, the Huffington Post and The Wall Street Journal.