This study examines the impact of extreme temperatures on energy-sector companies, highlighting the financial and economic consequences of these tempera­tures as an important aspect of financial performance analysis. The research methodology­ is based on the application of regression models to corporate financial statements. This research obtained statistically significant evidence of a relationship among asset structure, financial flows, and external temperature for 55 publicly traded energy companies from 20 countries. The transformation of asset and cost structures is a necessary adaptation measure for companies operating in regions with harsh climates; the results reveal a significant excess of capital expenditures over operating expenses under such conditions. This study identified changes in the structure of financial flows that increased the financial burden and reduced investment attractiveness for these companies. The J-factor’s nonlinear function reflects greater variability in operating conditions at low temperatures than at high temperatures, explaining contradictions in capitalization between regions with hot and extremely cold climates. The forced nature of the changes and the involvement of many sectoral players heighten the challenges in finding solutions to ensure market fairness and mitigate the uneven impact of climate change on businesses in colder regions. This study’s results partially explain inconsistencies in tariff setting and product cost coordination among companies in regions with extreme climates and those in more temperate areas and outline the contours of required management decisions at the global, national, and corporate levels.

The author expresses sincere gratitude to the attendees of the Lomonosov Readings in April 2025 and the 52^nd EBES conference in Istanbul in July 2025 for their insightful comments. The author also thanks Professor Viktor Suyts for his continuous support and the companies that provided financial statements and valuable comments for this study.

extreme temperature, IFRS, sustainable development, climate impact, capital expenditure, operating expenses.

In recent decades, various academic studies have investigated how environmental changes affect economic and social outcomes. This growing interest is driven, on the one hand, by a significant increase in the frequency of natural phenomena with negative and even catastrophic consequences, such as floods, tsunamis, cyclones, and snowstorms (Dell et al., 2014; Meierrieks, 2021; Rahmstorf and Coumou, 2011). On the other hand, it is driven by global climate change, which leads to a decline in gross domestic product (GDP) (Burke et al., 2015; Callahan and Mankin, 2022; Moyer et al., 2014), gross regional products (GRP) (Kalkuhl and Wenz, 2020), and economic growth (Wan and Wang, 2024). The annual damage from environmental factors, even in the “climate-friendly” European Union, is expected to rise from EUR 4–5 billion per year in 2022 to EUR 32 billion per year by the middle of the 21^st century (PwC, 2022). The impacts of climate change are unevenly distributed across countries and regions (King and Harrington, 2018); however, the geographic coverage of data and the level of spatial disaggregation in thematic studies remain limited (Brzezinska and Jasper, 2024). Research primarily focuses on global warming, increasing social stratification between developed and developing countries resulting from climate effects, and the analysis and prediction of how shifting climate patterns affect economic metrics at both the macro and micro levels (Wang and Lin, 2021; Nguyen and Khominich, 2023). It also examines the benefits of renewable energy adoption, particularly in sunny climates (Zehri, 2025), with limited consideration given to northern regions (Butt and Kousar, 2024). The effects of extreme temperatures, which are common in Northern Hemisphere countries such as Canada, Norway, Russia, and Kazakhstan, on economic activity and indicators are not the primary focus of academic research. Moreover, a large portion of production capacity in the extractive and manufacturing sectors — particularly those related to hydrocarbon energy sources — is located in these areas; therefore, research concerning them is becoming increasingly relevant and urgent.

The discussion of how production elements of the modern economy respond to climatic conditions is an important component of the academic literature (Ponticelli et al., 2023). Some studies indicate a linear response in developing countries (Dell et al., 2012), while others indicate a clearly expressed nonlinear­ response at the regional level, even in economically developed countries (Graff Zivin and Neidell, 2014). Furthermore, some studies found no significant ­response to temperature at the macro level in wealthier countries (Burke et al., 2015). Research has also described this association as an inverse U-shaped nonlinear relationship between temperature and economic indicators, such as GDP per capita growth (Chang et al., 2020), labor productivity (Cai et al., 2018), and even sports results (Qiu and Zhao, 2019). Climatic conditions determine the nature of this dependence (U-conditions/factor) and influence corporate financial flows and the macroeconomic indicators of countries and regions. Studies on the consequences of global warming indicate that the symmetry of the letter “U” reflects the proportionality of the “upper” (hot) and “lower” (cold) temperature corridor; the apex is the point where the direction of temperature’s impact on the economy shifts. U-terms can affect the parameters of companies’ adaptation to unfavorable climatic conditions and the consequences of weather-related cataclysms (Dell et al., 2009). At the same time, for companies located in regions with persistently cold temperatures, U-terms are more accurately considered J-terms. The short part of the “J” represents fewer restrictions and a narrower temperature corridor of “heat,” while the longer arc reflects more constraints imposed by severe cold and a wider temperature corridor below 0 °C. The temperature range of the external environment marked by frequent transitions through freezing and sustained extremely cold temperatures¹ — typical of companies in the Northern Hemisphere (Al-Shatnawi et al., 2024) — contrasts starkly with the conditions of energy resource extraction and transport in milder climates where end consumers are located. Shifting work activity to nighttime in hot regions can significantly ease production constraints; however, cold environments do not offer similar flexibility. Cold regions are characterized by forecast uncertainty, leading to long and unpredictable periods of “waiting for the weather,” which significantly reduces the time available for outdoor work in unprotected environments (Gudmestad and Karunakaran, 2012). This situation alters the balance between inputs (material, labor, and financial resources) and outputs (productivity, competitiveness, and financial performance), especially compared to companies operating in more moderate climates. Compared to their sectoral counterparts in temperate climates­, companies operating in severely cold regions change their financial model structure (assets and expenses), one of the key elements in business adaptation to specific temperature regimes (J-terms). This change also constitutes a factor in the broader competitive environment.

Companies operating in regions with severe temperature conditions face higher adaptation costs, resulting in increased financial strain and less attractive financial metrics for investors due to the greater upfront investments required (Bonakdar et al., 2017). These differences create a competitive advantage for certain market players and warrant consideration when evaluating the efforts of relevant companies in achieving Sustainable Development Goals (SDGs) and mitigating environmental, social, and governance (ESG) risks. Corporate assessments are foundational in shaping global macroeconomic indicators (such as GDP, GRP, and industry-specific metrics) and determining the attractiveness of companies’ investments. Therefore, the relevance of studies examining the temperature — economic dependency of corporate reporting indicators (including the structure of balance sheet assets and company expenses) will continue to grow.

Our study examines the dominance of specific information-significant reporting indicators (ISRI) (Rodchenkov, 2022) in categorizing costs that contri­bute to the residual value of fixed assets (FA) in energy-sector companies. The tested hypothesis suggests that the harsh temperature conditions² where these companies operate can increase investment in production facilities (higher FA costs) and change the structure of financial flows. These factors result in a relative, though not absolute, reduction in operating expenses and depreciation charges. This study reviews the theoretical aspects of uneven adaptation, examines empirical approaches to assessing adaptation elements, and conducts an empirical analysis to test this hypothesis. The results are then examined and discussed.

The academic debate on the relationship between weather effects and economic indicators addresses various issues related to identifying, accounting for, and mitigating the negative consequences of natural disasters. Consistent with the logic of identifying changes that companies undergo due to climatic factors­, this process constitutes the internal basis of adaptation (Dell et al., 2009). Successful adaptation largely depends on three key elements: timely recognition of the need for adaptation, an incentive to adapt, and the capacity to adapt. The introduction of new information technologies into related processes (Butt and Abdelaziz, 2025) and systemic government support for investment schemes within the framework of institutional and multilateral lending and aid funds, in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) (Butt and Kousar, 2024), facilitate effective adap­tation. In most cases, such an adaptation may not require direct investments tied to climate-change structures; instead, it may involve reallocating one type of capital to another (Fankhauser et al., 1999).

The content, pace, and cost of adaptation are context-dependent on climate-impact parameters, with temperature — economic dependence playing a decisive role (Song et al., 2023). Weather affects regional economic growth, sectoral economies, production factors, and productivity (Wan and Wang, 2024), and temperature influences adaptation parameters through sectoral specifics, means of production (infrastructure and technology), and labor and material resources.

One factor influencing adaptation costs is business size, which enables the diversification of climate risks (Acharya et al., 2023). Larger production structures are generally less susceptible to the negative impacts of climate change, apparently­ due to higher initial investments that provide a certain “safety margin” for operating conditions and equipment (Ponticelli et al., 2023).

Differences in business characteristics lead to significant disparities in adaptation capabilities. This suggests that technology and experience alone are unlikely to fully mitigate global economic losses (Deryugina and Hsiang, 2014) and that adaptation to climate change may be more complex and far-reaching than pre­viously thought (Tol, 2009; Burke et al., 2015).

The available data highlight several important aspects of this study’s methodo­logical focus and the a priori perception of the phenomena considered. First, a significant portion of the empirical research focuses on assessing rising temperatures, noting that adaptation effects imply that warming can induce adaptive behavior aimed at better coping with changing climatic conditions (Meierrieks and Stadelmann, 2024). In this context, the adaptation of economic actors is considered and assessed in view of the long-term impact of temperature increases beyond established climatic norms (Dell et al., 2009). Climate change is typically regarded as a cumulative and persistent phenomenon (Greßer et al., 2020). Consistent with the global-warming agenda, many studies have concentrated on the impacts of high temperatures, presenting evidence of adverse effects on humans and the environment (Barreca, 2012; Dahl et al., 2019; Otto et al., 2018; Zanocco et al., 2018), including agricultural production (Churchill et al., 2023), manufacturing (Ponticelli et al., 2023), labor productivity across sectors (Cai et al., 2018), labor income (Dell et al., 2009), and regional financial stability (Wu et al., 2023).

Studies on the temperature — economic relationship by business size reveal a consistent pattern. Specifically, above-average temperatures increase energy costs and reduce productivity in small enterprises, with little to no effect on larger firms (Ponticelli et al., 2023); thus, the primary analytical focus remains on adaptation to warming. Moreover, extreme temperatures are widely recognized as one of the most destructive environmental factors (IFRC, 2022). At the same time, data on the impact of extreme temperatures on corporate financial reporting remain fragmentary (Addoum et al., 2020, 2023; Pankratz et al., 2023). Research on the impact of severe temperature conditions on company operations, infrastructure (Coonan, 2023), and productivity (Zhang et al., 2023) is also scarce.

The issue of how production elements function under harsh temperatures falls largely outside the scope of existing studies. However, the geographic expansion of production activities into regions with harsh climates, especially in the energy­ sector, highlights the need to understand the effects of low temperatures on techno­logical processes (Galikeev et al., 2015; Gudmestad and Karunakaran, 2012), corporate performance, and financial outcomes (Griffin et al., 2024).

Second, research results are often considered and assessed as external effects, which imposes certain restrictions on their applicability and shapes their interpretation. Thus, some countries have successfully adapted to both hot (the United Arab Emirates) and cold (Canada) climates (Greßer et al., 2020). At the same time, enterprises that have successfully adapted to high temperatures gain a particular competitive advantage (Ponticelli et al., 2023). However, the cost of this competitive advantage (and its economic assessment, given the high cost of modern energy-saving technologies, materials, and specialized competencies) remains largely outside the scope of research on the temperature — economic relationship (Bonakdar et al., 2017; Al-Shatnawi et al., 2024). Existing research primarily assesses the comparative feasibility of such adaptation at the national and regional levels (Burke et al., 2015).

Therefore, defining and reliably assessing the nature of the relationship between severe temperatures and corporate reporting indicators — specifically the cost characteristics of production assets and the financial resources required to maintain their operability — is of significant academic and applied relevance. It is imperative to consider these aspects when making decisions related to financial flow management and selecting medium- and long-term investment targets capable of mitigating the negative impact of the J-factor and supporting corporate competitiveness.

Our study’s results support the following conclusions.

Severe temperatures are an important factor influencing the structure of physical and financial business indicators. Operating under such conditions increases companies’ financial investments in fixed assets (FA), reflected in higher FA values reported in corporate financial statements.

The shift in predicted probabilities toward lower operating expenses and annual depreciation values (based on the estimated relationship between the severe temperature regime and the selected ISRI) supports several key conclusions. First, this shift reflects a structural change in corporate costs. An increase in capital investments accompanied by a relative decrease in operating expenses confirms the validity of the second part of the research hypothesis. Second, CapEx typically exceeds OpEx by several multiples, resulting in a persistently elevated financial burden on businesses operating in severe temperature zones. This situation creates an intra-sectoral imbalance in the objective assessment and reporting of business efforts toward achieving SDGs. It also affects the comparability of reported financial indicators for companies operating under different climatic conditions. Third, the relationship between operating expenses and severe temperatures may also be indirectly influenced by other contextual factors, such as dividend policies, tax regimes, government support measures, and corporate strategies for maximizing profitability. Nevertheless, the study’s results provide strong evidence of a systematic influence of temperature on the structure of corporate assets and financial flows.

The results outline a broader problem of increasing financial pressure on companies primarily engaged in production activities, specifically hydrocarbon extraction, processing, and primary transportation. Many of these companies are subject to the most significant impact of severe temperature conditions (the J-factor). Without a well-developed and tested methodology for incorporating such climate-related risks into financial reporting, these companies will likely be required to allocate additional reserves. This allocation may, in turn, adversely affect key financial ratios and reduce their investment attractiveness compared to other market participants. Addressing these issues may require revising the coefficients, standards, and reserve thresholds currently used in reporting. Introducing progressive scales that account for the disproportionate burden faced by “producers­,” as compared to “intermediaries,” in the global hydrocarbon market could help mitigate this form of systemic “social injustice.”

In corporate reporting, the International Accounting Standards Board has expanded initiatives to improve the accounting and disclosure of climate risks, including temperature risk; however, these initiatives are lagging.6 This situation underscores the need for sector-specific standardization initiatives at the BRICS+ level, particularly in close cooperation with OPEC+, as many energy-sector players are members of these associations. A critical issue in relations among the members of these associations, especially OPEC+, is the consideration of J-terms in decision-making. Comparable infrastructure (that is, FA) in severe temperature conditions is substantially more expensive than similar projects in more temperate regions. For example, some experts estimate the cost of the Eastern Siberia pipeline⁷ to be a “­colossal” $16 billion. The Coastal GasLink pipeline in Canada cost $14.5 billion, with a 29% cost overrun attributed primarily to challenges in securing qualified labor. Similarly, the cost of the expanded Trans Mountain pipeline, commissioned in early 2024, is estimated at CAD 33.4 billion (approximately $24 billion).

In contrast, according to the Global Energy Monitor, the estimated cost of building a pipeline of comparable length (about 1,100 km) in Argentina is $4.1 billion (Langenbrunner, 2023, p. 11). The influence of the J-factor on production costs in the energy sector creates structural disparities that may lead to conflict and unfair competition. Production costs in countries with warm or hot climates are often significantly lower than those in colder regions. In such harsh conditions, cost capitalization dominates operating expenses, unlike in milder environments. This imbalance in accounting strategies can create unfair practices and financial losses for bona fide investors. Therefore, this study’s findings highlight a global issue: the urgent need for cooperative solutions that address the financial burdens imposed on companies forced to adapt to severe climatic conditions.

The global nature of this problem necessitates a separate study to explore approaches for its effective resolution. The initial conditions for developing a solution are as follows. First, the interests of consumers and producers must be distinguished. Second, all stakeholders must understand that the impact of climate on the economy is objectively real and varies significantly. Third, the super-marginal nature of energy resource production under favorable conditions predetermines a significant competitive advantage for residents of certain economies compared to industry competitors with high production thresholds. Coordinated solutions that consider the interests of all industry participants are required (OPEC+ is a clear example of international coordination).

Conceptually, the solution’s elements should include (a) global industry regulation measures, (b) easing the financial burden at the corporate level, and (c) increasing target companies’ investment attractiveness.

In this context, global industry regulation requires that J-terms be considered in the discussions and decisions of OPEC+, the IEA, BRICS+, and the G7. The WTO could serve as a logical communication channel, given the desire of many G20 economies to revive its functionality.

A framework for business — government relations focused on the accurate assessment and allocation of responsibility for the economic consequences of climate and environmental risks affecting businesses in extreme conditions could be a useful solution. Moreover, a global industry rating for the geoclimatic gradation of production could be used to increase transparency at the international level. This unified rating would serve as the basis for industry benchmarking and would allow for the identification and uniform assessment of the industry’s cost of J-term variability. Such data can help adjust climate and environmental risk assessment models. Companies should conduct climate risk assessments using standard industry methods. Expanding the use of agent-based models appears beneficial for improving the quality of modeling.

At the national level, solutions that ensure a timely response to challenges are appropriate. The development of a system of indicators to identify elevated financial risks in mining and production companies could be a key element of such a system. The excess of CapEx over OpEx relative to the estimated J-factor impact, based on a unified benchmark, could serve as a key indicator. This approach would help minimize environmental risks associated with abandoned real estate, structures, and equipment, similar to the abandonment of Arctic development assets following the collapse of the USSR. Comparable cases have been observed in the Canadian North and Alaska (Kirdyanov et al., 2020).

Implementing the proposed measures may require amendments to IASB and ISSB standards. The estimated scope of the required additions and clarifications covers at least three standards. Thus, it would be appropriate to supplement IFRS 1, “First-time Adoption of International Financial Reporting Standards,”⁸ with a requirement for mandatory disclosure of corporate J-factor index amounts based on global benchmarking, with separate line items in the statements of financial position and comprehensive income. Furthermore, amending IAS 37, “Provisions, Contingent Liabilities, and Contingent Assets,”⁹ and IAS 12, “Income Taxes,”¹⁰ regarding the procedure for recognizing provisions for estimated liabilities¹¹ in the tax base could ease companies’ tax burden.

Following the guidelines of the Basel Committee on Banking Supervision, the financial burden on target companies could be eased by introducing reduced risk ratios for industry manufacturers and increased risk ratios for intermediaries when calculating the capital adequacy ratio of credit institutions.¹² This step, along with preferential interest rates, could significantly improve companies’ access to financing and reduce their debt burden. Such measures could increase companies’ investment attractiveness, and they can be supported at the national level by expanding green financing practices and tax incentives for investments in target companies.

The measures described should be considered conceptual and potentially feasible, requiring consideration of the national economic situations of relevant companies. Although they are not comprehensive recommendations, their practical utility lies in defining the contours of possible systemic management decisions.

The results are based on a sector-specific sample. As such, the findings are open to debate and may be confirmed or challenged through research using different sample characteristics or alternative methodologies. Nonetheless, the risk of a Type I error appears to be minimal.

Our study’s results confirm the hypothesis regarding the relationship between the high cost of fixed assets (FA) and severe ambient temperatures in the areas where energy-sector companies primarily operate. Severe temperature conditions are a significant adaptation factor and contribute to changes in the structure of assets and business financial flows, specifically an increase in FA costs with a relative decrease in operating expenses and depreciation. This pattern is not typical for companies operating under moderate or favorable temperature conditions.

The results highlight a broader issue of intra-sectoral imbalance in assessing company efforts to achieve SDGs. They also highlight the limited comparability of financial reporting indicators between companies operating in harsh climates and those in more temperate regions. The analysis revealed a persistently ele­vated financial burden borne by companies conducting production activities under severe temperature conditions. This problem requires urgent resolution at the sectoral level on a global scale and is particularly important given the widespread presence of the J-factor among many industry players and its global implications.

These results can provide a foundation for further research into external environmental factors. The findings can also support the development of a well-substantiated position for protecting national business interests in global markets. Additionally, they provide a basis for creating sector-specific comparison algorithms that promote a fair assessment of corporate efforts to achieve SDGs while helping mitigate the J-factor’s negative impact at the company level.

The author expresses sincere gratitude to the attendees of the Lomonosov Readings in April 2025 and the 52nd EBES conference in Istanbul in July 2025 for their insightful comments. The author also thanks Professor Viktor Suyts for his continuous support and the companies that provided financial statements and valuable comments for this study.