Adapt

More than ever, businesses are facing climate-related physical risks that are capable of seriously disrupting their operations, supply chains and the stability of markets. Since climate-related extreme events are expected to become even more severe and frequent in the future, it becomes more and more urgent for companies to not only track their emissions and perform mitigation actions, but also to embark on their journey of taking climate action in their adaptation to the physical risk related to climate change to secure the sustainability and resilience of their business model in the long term. Even in an optimistic 1.5 scenario, there is a substantial amount of losses due to climate change that is expected and thus requires substantial efforts in adaptation. Also, as stated by the World Economic Forum, there is even a threefold business case for adaptation that not only enables companies to avoid economic losses, but also to increase revenues and save costs by capitalizing on opportunities as well as to gain from mutually beneficial outcomes by contributing to protecting communities and ecosystems.

Climate change adaptation is a topic that is relatively new to businesses and, in 2022 only a minor share of 21% of companies already had adaptation plans in place according to S&P Global. For most, it is a challenge how to kickstart working on the topic within their own business structure in a concerted manner. Common challenges concern the planning, coordination and monitoring of diverse adaptation activities in separate value chain areas towards a common adaptation goal, the selection of adequate and efficient measures, the integration of adaptation planning into existing processes and the allocation of capital towards adaptation measures. Thus, it is crucial for business to seek clarity on essential steps and common obstacles to consider when embarking on their adaptation journey.

What steps can businesses take?

Step 1: Establish a continuous process for climate risk analysis

To adapt to climate change, businesses must first understand their current and future climate risk. To start their climate risk analysis, businesses must define the scope by engaging relevant business units and gather appropriate data, including geo-spatial data and climate scenarios. Partnering with risk identification providers ensures accurate outputs, and applying three lenses—current risk level, change in risk, and risk across transition scenarios—provides a comprehensive understanding. Continuous monitoring and reassessment, along with alignment with regulatory requirements, help businesses proactively manage risks and enhance long-term sustainability.

Step 2: Formulate adaptation goal and establish, prioritize and implement adaptation pathways

To establish a clear organizational ambition and goal for adaptation, businesses must engage relevant stakeholders to align goals with the overall business strategy. It is important that businesses define necessary activities and responsibilities to move forward work on adaptation within the business by creating an adaptation plan. Identifying and prioritizing adaptation pathways involves evaluating options based on cost, effectiveness, feasibility and impact, allowing for phased implementation and alignment with regulatory requirements. Leveraging opportunities from adaptation efforts can create new business models and revenue streams, for instance, companies that have invested into developing their own sophisticated methods of risk analysis can provide consulting services to other businesses, as practiced for example by insurers such as Munich Re, Zurich, and Swiss Re. Also, investment in resilience and infrastructure ensure long-term success and sustainability, for example investing in flood-resistant infrastructure not only reduces operational disruptions but also provides a competitive advantage in flood-prone regions. For example, in industrial parks in Thailand, where flood protection infrastructure investments, although highly capital-intensive, were justified by the even higher direct asset damage costs experienced by tenant firms. Moreover, businesses must establish robust governance frameworks with clear roles and responsibilities, creating dedicated teams to ensure coordination and alignment with business strategies. In addition, businesses must look beyond their own boundaries and seek collaborations with governments, suppliers, and communities to address physical risks and foster joint resilience initiatives.

Step 3: Continuously re-evaluate the performance of adaptation options

To ensure the success of adaptation actions, businesses should continuously monitor and re-evaluate their performance, implementing systems to track progress and effectiveness. Regular performance assessments help identify areas for improvement and necessary adjustments, ensuring actions meet their intended goals and enhance resilience. Additionally, it is crucial to regularly reassess climate risks and opportunities to ensure adaptation goals remain relevant and aligned with current and future business situations. This allows organizations to refine their strategies and stay ahead of regulatory changes, ensuring robust and effective adaptation plans. Learning from past experiences is also key; businesses should document lessons learned and use this knowledge to refine their adaptation plans. This iterative process of learning and improvement helps in creating more resilient and adaptive strategies.