August in Focus

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Article Type
The Wider Lens
Topic
Opinion
Published
September 02, 2026
Read time
8 mins
Author
Aegon AM Responsible Investment Specialists
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A Hotter Climate, a Cooler Economy: The Growing Cost of Europe's Heatwaves

 

Europe's recent heatwaves have highlighted the growing economic costs of extreme weather. Alongside the visible disruption to infrastructure, transport networks and power generation, elevated river temperatures have even forced temporary reductions in output at some French nuclear reactors.

 

Shortly before the latest heatwave, economists at Allianz published analysis examining the broader economic impact. Their findings cited evidence suggesting labour productivity declines by around 3% for every 1°C increase in temperature between 30°C and 35°C, while electricity demand rises by approximately 1.2% per degree above 30°C as cooling requirements increase. For comparison, previous European heatwaves have reduced annual GDP by up to 0.5% across Europe and by more than 1% in some southern European economies.

 

More recently however, Triodos Bank warned that this year's extreme temperatures could reduce European GDP by almost 1%, effectively eliminating expected economic growth. This impact is unlikely to be evenly distributed, with Southern and Central European economies expected to face greater challenges than northern regions.

 

Looking further ahead, Allianz modelled a scenario in which the five hottest years of the past decade became the norm through the remainder of this decade. Under this scenario, cumulative GDP losses of 5% to 7% could occur across major European economies including Germany, France, Italy and Spain.

 

 

The Cost of Sustainable Flight

 

American Airlines recently completed the first US commercial passenger flight using electro sustainable aviation fuel (eSAF) delivered through standard airport infrastructure. Produced from captured CO₂, renewable electricity and green hydrogen, the fuel was blended with conventional jet fuel and used without modifications to aircraft or fuelling systems.

 

The flight is significant because aviation remains one of the hardest sectors to decarbonise. The industry's net-zero pathway relies on sustainable aviation fuel (SAF) delivering around 65% of emissions reductions by 2050, yet SAF currently accounts for less than 1% of global jet fuel consumption. Under the EU's ReFuelEU Aviation framework, SAF blending requirements will increase progressively to 70% by 2050, with specific quotas for synthetic fuels such as eSAF.

 

Bio-based SAF is expected to dominate over the next decade due to its lower cost and commercial availability. However, its long-term scalability is limited by its reliance on constrained feedstocks such as used cooking oil, animal fats and agricultural residues.

 

The biggest hurdle for eSAF remains cost. It is currently around seven times more expensive than conventional jet fuel, making widespread adoption challenging. However, achieving long-term decarbonisation targets is likely to require a greater role for synthetic fuels, particularly if production can be scaled and costs reduced.

 

 

The Arctic Shortcut: Faster Trade, Higher Risks

 

China has spotted an opportunity associated with the arctic sea retreats caused by climate change – it is increasing its use of the Arctic’s Northern Sea Route as an alternative trade corridor between Asia and Europe. Chinese shipping group Sea Legend is launching the first regular container service between Ningbo and Felixstowe, with transit times potentially reduced from around 40 days to approximately 20 days.

 

While it is understandable to a point that shipping companies seek to avoid geopolitical chokepoints, the move also highlights how climate change is reshaping global trade routes and supply chain economics. However, increased vessel traffic raises environmental risks, including pollution, oil spills and damage to sensitive ecosystems, while also creating geopolitical tensions around Arctic governance and Russia's role in regulating the route. All is not all plain sailing, so to speak.

 

 

Forced Labour scrutiny on the increase

 

A recent report from JP Morgan highlighted some changes in forced labour risks as Europe strengthens regulation and the US links trade policy to forced labour enforcement.

 

The report highlighted two distinct regulatory approaches: a US-style “border enforcement” model, exemplified by the Uyghur Forced Labor Prevention Act (UFLPA), and Europe’s traditional “corporate conduct” model, which focuses on due diligence, disclosures and supply-chain oversight. The EU Forced Labour Regulation (EUFLR), effective from December 2027, introduces product bans but currently lacks the geographic specificity and rebuttable presumption mechanisms that have made US enforcement effective.

 

Historical experience suggests litigation and reputational damage remain the primary risks for companies. Under France’s Duty of Vigilance Law, only three companies have been found liable to date and financial penalties have been modest. The proposed UK Modern Slavery Act reforms would introduce penalties, but these are capped at the greater of £1m or 1% of turnover.

 

In ESG terms, scrutiny of supply chains is likely to intensify, particularly in sectors with complex global sourcing. However, absent stronger enforcement tools or a more protectionist geopolitical environment, the risk at the moment is limited. In time, there could be earnings disruption or material financial penalties if the regulators decide to get tougher.

 

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Aegon AM Responsible Investment Specialists
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