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A 1°C mean temperature increase sees small European companies lose 7% of operating income, new Henley Business School study finds

Thermometer

New research reveals that small and micro businesses in Europe lose 6.8% of their operating income when the yearly mean temperature increases by 1°C.

Examining the fluctuations in local temperature at the businesses’ headquarters and mapping these onto their financial takings, researchers discovered higher temperatures had a financially significant impact on profits.

Incorporating data from countries across Europe and across sectors including manufacturing, hospitality, education and construction, the study found that small companies across the countries and the sectors are more susceptible to adverse weather conditions as they are often operating with fewer resources, with limited access to funding and geographically concentrated assets.

Reacting in different ways, some companies manage to mitigate against the risks. The study found that family-owned businesses suffer less from rising temperatures as they are more likely to take the long-term view, considering and planning for future risk. They’re also more likely to have managers with a vested interest who are able to respond better to manage climate risk. Also, the study showed government-controlled businesses tend to be more risk-averse, so see much less of an impact from rising temperatures.

Firms that are constrained financially fare worse. Those unable to access sources of financing struggle to easily access resources to mitigate climate risk and recover swiftly when affected by major weather events such as floods and heatwaves.

Simone Varotto, Professor in Finance at Henley Business School, said:

“As most enterprises worldwide can be classed as small or micro, there will be a significant financial cost to pay if something is not done to tackle climate change.

The Impact of Global Warming on Small and Micro European Firms was conducted by Simone Varotto, Zhenghong Ding, and Alfonso Dufour at the ICMA Centre, Henley Business School, and Lara Cathcart from Imperial College Business School.

Researchers looked at nearly 7 million firm-years’ worth of financial data was taken from companies across Europe: Austria, Belgium, Switzerland, Germany, Denmark, Spain, Finland, France, UK, Ireland, Italy, Netherland, Norway, Portugal and Sweden.

Data was taken from a wide range of industries, such as manufacturing (19%), construction (15%), administration (5%), transportation (5%), hospitality (4%), agriculture (2%), education (1%), and arts, entertainment and recreation activities (1%).

The paper defines ‘small firms’ as those with between 2-10 million Euros in assets and ‘micro firms’ as companies with less than 2 million Euros in assets.

Professor Simone Varotto

Professor in Finance

Dr Alfonso Dufour

Associate Professor of Finance
Published 17 January 2023
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