Beating Extreme Heat: Designing and Investing in Resilience

Credit: Jolene Siana

This summer’s record-breaking temperatures brought increased hospital visits and even deaths in communities across the United States. The human costs are both tragic and undeniable—and they are only the beginning of extreme heat’s impacts.

“The economic consequences of sustained days of extreme heat that we’ve seen this season will credibly place it among [the National Oceanic and Atmospheric Administration’s] billion-dollar events,” said Ashley Ward, director of the Heat Policy Innovation Hub at Duke University’s Nicholas Institute for Energy, Environment & Sustainability, “especially once you take into account labor loss, agricultural loss and decreased yields and unprecedented demands on local governments and their budgets as they try to prepare for and respond to something like this.”

During Climate Week NYC, Ward moderated a panel discussion that sought to expand the conversation about the impacts of extreme heat “not just on lives, but on livelihoods.” At the event, experts discussed how innovations in the financial and insurance sectors, along with partnerships with philanthropy, can help communities plan, prepare for and mitigate this growing challenge. 

The event, organized by the Nicholas Institute in partnership with Duke’s Office of Climate and Sustainability and hosted by Holland & Knight LLP, was aligned with the Duke Climate Commitment. It was one of several Climate Week NYC events involving Duke experts and partnerships. 

Here are highlights from the panel:

WHY HEAT DOESN’T DRAW AS MUCH ATTENTION AS OTHER CLIMATE-RELATED HAZARDS

“Heat as an emergency—especially if you’re talking about people who live in the Northwestern Hemisphere—is not an issue because we think we have it under control,” said Rev. Dallas Conyers, faith and justice, equity, diversity and inclusion manager for the Southeast Climate & Energy Network. “We have our air conditioners; we’re a relatively wealthy community as a nation. It’s not an issue because we don’t understand what extreme heat means in terms of systems.”

“The experience of heat in Miami is very uneven,” added Galen Treuer, climate tech and economic innovation manager for Miami-Dade County. “We all experience it, but some of us can just get out of it and take care of ourselves. Others really don’t have that option.”

HOW THE INSURANCE INDUSTRY APPROACHES HEAT

While health insurers have considered extreme heat’s effects for a long time, the property casualty side of the industry historically has not. That’s changing as the economic impacts of heat become better documented, said Francis Bouchard, managing director for climate at Marsh McLennan.

“There’s a realization that this is starting to show up in workers comp insurance and in other types of traditional coverages,” Bouchard said. “I do think that there’s a growing recognition that the habitability of large metropolitan populations—or even rural ones—is starting to be called into question, and that means markets for us.”

“I do think there is a growing capability of the insurance sector to play a role here,” he added. “One of the requirements is an innovative approach. The traditional approach of insuring people one at a time is not really going to work. To go in and assess whether your heat insurance policy was hot enough … our bodies are different. That would be really difficult if we had to adjudicate policies one by one.”

HOW INVESTORS COULD HELP COMMUNITIES PREPARE FOR HEAT

In the United States, local infrastructure projects are largely funded through the municipal bond market in which financial institutions lend to government entities.

“If lenders are worried about climate risk—whether that’s sea level rise in Miami or drought out west—they would put pressure on cities to do something about it,” said Evan Kodra, senior director for climate and environmental, social and governance (ESG) with the Intercontinental Exchange. “This whole closed-loop ecosystem is ideally one where cities would borrow money for capital costs to invest in climate-resilient infrastructure.”

ON INVESTMENTS IN SCHOOLS

Approximately half of the municipal bond market involves lending to public schools—many of which do not have sufficient air conditioning systems to keep students cool in extreme heat. One estimate suggests $25 billion to $30 billion in funding could address the problem nationwide.

“There’s a potential for ecosystems like the municipal market to act on that and do something about it,” Kodra said. “One of the challenges there is that there’s no coherent plan to do so because of how fragmented that market is and because of how disintermediated investors are from the ground-level concerns of people in those communities.”

“The market’s primary design is very centered around investors and not communities,” he added. “The problem with that is investors are looking to keep their money as safe as possible. So if you think of any public school district that’s experiencing poverty, has been redlined, etc., they are largely left out of this whole conversation. That’s where we need outside support from philanthropic organizations, federal grant money and creative activists and individuals.”

HOW THE PHILANTHROPIC SECTOR VIEWS HEAT

Perceptions of heat can vary wildly even within the same city. As an example, Sonali Patel, a partner with The Bridgespan Group, cited a 31-degree difference between heat monitors placed in the Upper East Side and East Harlem in New York City around midday on a summer day.

“While people hear about heat and they talk about it, they don't really experience it in the same way,” Patel said. “As a result, philanthropy oftentimes thinks of heat as a future problem or the next problem or something that really is in the Global South and not something that we’re thinking about in our built environment.”

At the moment, philanthropic efforts to address climate change skew more heavily toward mitigation efforts to reduce greenhouse gas emissions rather than adapting to threats that already exist, such as extreme heat, Patel noted.

“One of the things we need to do is create the ‘on ramps’ for philanthropy into things around adaptation and resilience,” she added. “I think a lot of that will have to be locally done because a lot of the issues are very local in nature.”

ON HOW PHILANTHROPIC INVESTMENT CAN AID COMMUNITY EFFORTS

Passed by Congress in 2022, the Inflation Reduction Act (IRA) includes historic federal funding to address climate resilience. However, communities face challenges in getting the money and then utilizing it in ways that will be most beneficial.

“I think the role of philanthropy is it really needs to step in in places where it can leverage rather than just do a nice story,” said Treuer. “There's been a lot of grantmaking that is supportive and demonstrating something, but we need to be really strategic in this climate work right now and leverage the Inflation Reduction Act money.”

“While IRA funding is going to be catalytic, there are a lot of communities without philanthropy that can't actually access the funding,” added Patel. “They don't have grant writers, so they can't actually go ask for the funding to be able to do anything in the community. And that is small-dollar, small-p philanthropy that can actually have tremendous impact on any given community.”

Through what is known as forecast-based insurance, the insurance industry is exploring ways to work with philanthropic organizations and others to address heat before it reaches a catastrophic point that requires major payouts.

“What we're trying to do is actually pay funds to communities and individuals before it reaches that cataclysmic level so that they can take action to actually reduce their exposure to the heat,” explained Bouchard. “Whether it's to open up a resilience center or to distribute water or take people off the fields who are working, you could plot in the expense of these interventions and start what we call a cool capital stack. We're trying to stack different forms of capital return expectation into a common set of interventions that would be funded earlier by philanthropy and later by insurance.”

ON TAKING THE LONG VIEW

While air conditioning is vital to protect the most vulnerable now, Conyers noted that its use is ultimately harmful to the environment and contributes to raising temperatures.

“In our planning and thinking about resilience and adaptation, air conditioners can only be the very first step in a planned non-long-term solution,” she said. “So we're asking people now to invest in something that we know we'll need to phase out in a very short-term timeline. That is a hard ask when you're looking at people who are dying right now.”

For those who are most impacted by heat, taking the long view can be difficult when living paycheck to paycheck.

“We're talking about people who are dealing with the psychological dialogue of telling them that everything is absolutely their fault, everything they're experiencing is on them,” said Conyers. “We have to think about how we not only speak to people about impending costs, but also introduce to them that your life is valuable enough to implement long-term thinking beyond tomorrow and next week—and that your life is also valuable enough that you need to take off time from work, risk eviction so that you can be alive in 10 years and not having died of kidney failure and other related diseases of heat.”

ON PARAMETRIC INSURANCE

In other parts of the world, parametric insurance is starting to be used to cover heat-related costs. These policies pay out a set amount of money to groups at a certain trigger—say, three consecutive days of overnight temperatures over a particular threshold.

“There are some states in the country that don’t allow parametrics, so we still have a regulatory dialogue,” Bouchard said. “But I do think that the incredible efficiency of the parametric product will start to be utilized in the United States because it's almost used more in the microinsurance space to some degree and could be used a lot more in the U.S. market. I do think you'll start to see programs for construction workers, for agricultural workers, for that outdoor economy start to appear with either employers or communities or unions or others being the aggregated buyers of the product.”

ON ALIGNING INVESTOR GOALS WITH IMPACT ON COMMUNITIES

For most investors in financial markets, real-world impact is not their primary concern, Kodra explained.

“Most of what investors are interested in, even from an ESG perspective, is purely factors that they're integrating into their analysis to de-risk their own investments for themselves,” he said. “We talk about risk analysis in financial markets a lot—it almost never means risk to real people and communities. It means risk to the ultra-high-net worth people who already are fine. That's the problem.

“My hope is that there are a lot of people in that world at the same time that do care; it's just they're entrenched in the system,” he added. “The other hope I have is that eventually in the long term—maybe over the next 5 to 10 years—that we catalyze engagement by more regular people.”

ON IDENTIFYING AND FUNDING EFFECTIVE POLICY SOLUTIONS

“A lot of philanthropists are actually interested in getting down the cost curve with new innovation,” said Patel. “That's a place where they see a role that they can play. If they invest, they can help make things affordable so then it could be used in more everyday places.”

“I think Seville, Athens and California are the only three jurisdictions who rate or rank heat waves,” said Bouchard. “I'm not saying that that solves everything, but … we could start to have a common understanding of the exposure and the risks that heat poses. And then I think it's going to be easier to start to identify the interventions that we can make.”

“Indigenous communities all over the world, especially in the Global South, had thriving civilizations with architecture that was suitable for heat,” said Conyers. “They knew how to build to displace heat, to circulate air in their buildings. They knew how to build their communities with the proper spacing so that they didn't breed illness and contamination. And we just kind of came in and said, ‘Not valid.’”