Climate solutions are significantly underfunded and under-prioritised by both the public and private sectors. Currently, only an estimated 16% of climate finance needs are being met, with early technology readiness solutions experiencing the largest funding deficits. Barring serious changes being made quickly, according to the IPCC’s latest synthesis report, the world is now likely to overshoot the Paris Agreement goal of limiting warming to 1.5°C. 

The bulk of climate investment, to date, has focused on mitigation solutions like renewable energy, electric vehicles and shifting to electrification. While bringing emissions to net-zero as soon as possible is imperative, even with best efforts we know a certain level of warming is now locked in. It’s therefore crucial that governments and businesses alike prioritise adaptation and resilience strategies spending alongside mitigation. These resilience efforts will address risks arising from climate change, and importantly enable economies and businesses to grow and prosper in the face of increasing climate hazards. 

Building an Understanding of Climate Risks

In its illuminating 2018 report, the IPCC laid out the differences between a 1.5ºC and 2.0ºC world. The report revealed the blunt impacts of climate change where populations exposed to extreme heat and flooding will increase as we overshoot 1.5ºC, and crop yields will reduce. Climate change is thus a dual challenge of both addressing its cause - mitigation, and preparing for its consequences - adaptation. By maintaining inaction on adaptation, businesses will exacerbate their vulnerabilities to growing climate risks.

There are approaches companies can take to turn our climate challenge into opportunities to build stronger businesses. The Task Force on Climate-Related Financial Disclosures (TCFD) pioneered this approach in their recommendations put forward in 2017. The group rooted their recommendations in the risk tools well-refined by business, but through the lens of impacts arising from climate change. 

The pace of adoption and recognition of climate risks by governments, corporates and financial institutions has been encouraging. Climate risk disclosures are now being integrated into far-reaching regulations like the EU’s CSRD, UK’s SDR and developing US S.E.C rules that will make them standard for significant portions of the economy. Resources and guides on the relevant risks for individual businesses are also increasingly available through Government resources, financial bodies like the International Finance Corporation, and through climate-focused organisations like the Climate Change Committee and UK Climate Risk. 

Categorising Risks

With this momentum, climate adaptation efforts are further buoyed by a common framework to categorise risks. The TCFD breaks risks down into the categories of physical risk and transition risk. 

Physical risks are climate change impacts that directly affect people, infrastructure and ecosystems. This can be broken down into acute and chronic risks. Acute physical risks include extreme weather events like floods, hurricanes and heatwaves, and chronic physical risks include events such as desertification, ocean acidification and rising sea-levels. Businesses that rely on specific climate conditions, such as those in the agricultural sector, for instance, could be at increased risk when extreme weather events or chronic impacts occur. 

For example, water demand is increasing and there is already a growing mismatch between demand and available supply.  Even the UK is affected as last year we experienced some of the worst droughts in our history. Something like water, which may have been readily accessible in the past, could potentially become the cause of serious market disruption.

Simultaneously, transition risks include policy and legal, technological, market and reputational impacts as we manage the transition to a low-carbon economy. Policy and legal risks refer to changes such as exposure to litigation, GHG pricing shifts, or regulatory change. Transition risks for technology can, for example, come in the form of unsuccessful investment into new technology, or the cost and substitution process of transition to lower emissions technology.  

Market risks can include increased cost of raw materials, changing customer behaviour and uncertain market signals. Legacy businesses’ exposure to coal suppliers represents a market risk, as well as green businesses’ exposure to lithium supplies as demand increases. Finally, reputational risk can, for instance, refer to negative stakeholder feedback, sector stigmatisation, or shifts in customer preferences as climate change affects progress. 

Opportunities to thrive

Once the risks have been identified, businesses can start taking active steps to adapt and can look to take advantage of opportunities adaptation strategies can entail. Adaptation does not necessarily need to just be considered a survival necessity for businesses, it can be a driver of success. If approached correctly, adaptation is an opportunity to thrive. 

Funding adaptation strategies makes business sense for organisations looking to survive or even build profit over competitors struggling to navigate climate shocks they were ill-prepared for. For example, exposure to physical and transitional climate risks can cause major financial harm as companies struggle to keep pace with change or come back from damages. Integrating adaptation strategies and spending across a company’s operations can help to mitigate future cost stemming from likely climate impacts. As competitors scramble to adjust, it can be ‘business as usual’ for businesses that have adaptation strategies already in place. 

Resilience, in the long run, can also mean anticipating needs. For example, in coastal areas, the construction industry can be ready and available to rebuild infrastructure and provide the necessary protection. Not only will getting ahead of climate shocks in this way positively benefit affected communities, but it will also be an excellent business opportunity for organisations with the foresight to be readily on hand for reconstruction. It’s important to remember that it is within the interest of banks, governments and private investment bodies to support businesses that are resilient and have adaptation strategies in place as they reduce portfolio risks. Strong adaptation goals and proven resilience strategies can encourage investors to put money into the business as the business is designed to last. That money can be spent on competitive practices, like refining the business offering or scaling. 

Finally, investment into adaptation as a field of business in itself can be a robust future-looking strategy for success. We are already seeing fast development in burgeoning markets such as climate risks analytics through companies like Cervest, Jupiter, and Urban Footprint, and in GHG reporting with businesses like Persefoni, Watershed, and Normative leading the way. Biodiversity impact measurement and scoring by companies such as Basecamp Research and NatureMetrics is another growing category, driven by increasing understanding between the links of biodiversity and environmental resilience. These companies are working on building our baseline understanding of climate risks that inform solutions like water-saving technologies, cooling efficiency technologies, or resilience projects like Manhattan's East River Park renovation designed by BIG, London's super sewer, or mangrove restoration. 

For many organisations, the effects of climate change could be make or break. Resilience is not only a necessity for survival but also an opportunity to outlast competition. Organisations and investors should not be burying their heads in the sand when it comes to the effects of climate change, and must start taking advantage of adaptation solutions now.