Companies do little to adapt to realities of climate change

In 2019, the New York Times ran a piece about that most “sensitive and nuanced of agricultural products”: wine. The likes of Taittinger and Vranken-Pommery Monopole, among the best-known champagne producers in France, had been buying up acres of vineyards in the UK, ran the piece; bucking a tradition that stretches back almost half a millennium, and essentially “hedging their bets as the once-marginal climate in Champagne has warmed.” 

The once-unthinkable, a bubbly signed by Taittinger and produced in Kent, is an example of how some companies are responding to the impact of a warming planet. But in contrast to the efforts of many organisations to mitigate climate change – shifting to renewables, say, or setting net zero targets – Taittinger is opting to adapt to the changes its producers are already feeling or expect to feel in the future. And it’s an important distinction. While champagne-making in Southern England may have grabbed headlines on both sides of the Atlantic, the truth is that relatively little is known about the kinds of adaptation strategies that other firms or industries are adopting – if any.

Shedding light on this is London Business School’s Xia Li. She has merged climate science data with climate disclosure from more than 2000 publicly-traded companies around the world. What she finds is a cause for some concern. The majority of firms simply have no adaptation strategy in place for different climate exposures.

Photo: Xia Li, Assistant Professor of Strategy and Entrepreneurship at London Business School.

“Most firms do little in response to most climate exposures,” says Xia, who is an Assistant Professor of Strategy and Entrepreneurship, and an expert on corporate sustainability. Firms don’t adapt because they cannot accurately estimate the long-term impacts of climate change, having short-term focus, or expecting to transfer adaptation costs to governments.

“When I look at my data set, I see that the average rate of adaptation across all companies and climate risks is just 23%,” she says. “In general, companies are sensitive to the level of climate exposures they face. Exposures that are perceived as less severe or longer terms, just don’t elicit the same level of response.”

The other thing that jumps out, says Xia, is that that adaptive measures that firms take do lean towards tweaking the routine rather than instituting something new or non-routine: conducting business continuity plan or purchasing business interruption insurance, rather than meaningfully investing in research and development, or purposefully relocating to different regions for example.

To get this snapshot of systemic adaptation, Xia uses climate exposure data from Four Twenty Seven, a subsidiary of Moody’s that measures the projected climate exposures faced by public companies worldwide. The data covers 2,233 public companies in 47 countries, and includes a breadth of climate exposure threats from rising temperatures and scarcity of water to floods, hurricanes and typhoons. And to get a sense of what adaptation measures some of these companies are taking to real risks, Xia manually coded climate disclosure information from CDP, a global organisation that captures environmental impact disclosures, including firms’ adaptation strategies. Her final set covers a seven-year period from 2011 to 2017.

“The CDP data digs down into the actions that companies take which I was able to organise into categories like risk transfer on one end and innovation on the other. So you see companies like JBS, the global beef company doing things like assuming advance purchases or financial derivatives contracts to purchase agricultural commodities, which is an example of risk transfer,” says Xia. “The same survey responses show that Rolls-Royce for instance has been innovating more efficient products like the Trent XWB engine, which is designed to accommodate increasing ambiental temperature. So there you have an example of an innovation-based adaptation strategy to global warming.”

Looking at all of the data together, Xia says that while firms’ overall adaptation response is limited and focused on higher exposures, there is some evidence that ESG capabilities can have a positive influence on firms’ response. 

“I find that where a firm has integrated ESG more intentionally in its processes and systems, they do tend to be more responsive to higher climate risks. Though ESG capabilities don’t seem to moderate the way a firm will perceive future threats.”

Adapting to climate change should be as imperative to companies as mitigating its effects are, says Xia. Even if greenhouse gas emissions were to stop worldwide tomorrow, the planet would still continue to warm for two or three more decades. 

“Firms are more focused on mitigation in their efforts than they are on adaptation, but the reality is that climate change is here and it’s a reality.”

As 2023 went down as the hottest summer on record, with unprecedented temperatures and wild fires on both sides of the Atlantic, the pressure will surely be on to respond to the risks sooner rather than later. And the onus will be on firms themselves to do so, says Xia.

“We have policies on emissions and other types of mitigation, but there isn’t yet a mandate for climate change adaptation, as regulators usually expect companies to find their own incentives. Because adaptation is not only driven by physical climate exposure, but also influenced by socially derived factors such as perception and adaptive capability, adaptation policies need to be considered by governments. Also, I hope that companies will connect with the data I’ve shared in this study and use it as something of a benchmark to institute new measures, and steal a march on the very real risks facing their organisations, operating systems and ecosystems.”

Xia Li is Assistant Professor of Strategy and Entrepreneurship at London Business School.