Climate adaptation: what every business needs to know

In this article, we’ll explore:

• What climate adaptation is

• Why adaptation matters, and why organizations need to think about decarbonization and adaptation

• How adaptation feeds into climate risk reporting

• What good climate adaptation looks like

• The ROI for climate adaptation strategies – and the cost of getting it wrong

• How climate intelligence can help define and deliver an effective climate adaptation strategy

To find out more about how climate intelligence is shaping the future of organizations like yours, subscribe to our newsletter.

Climate adaptation is making adjustments to an organization that will support its ability to cope with and adapt to the impacts of our changing climate – now and in future. The Paris Agreement sets out its three main purposes: enhancing adaptive capacity and resilience, reducing vulnerability, and ensuring an adequate adaptation response to global warming.

Climate shocks and stresses are already affecting businesses, from direct impacts, such as damage to physical assets, to indirect causes, like supply chain disruption. Cervest’s survey of decision-makers in the US and UK found that 88% of respondents had their assets impacted by extreme weather in the past five years. It also revealed the insufficiency of our preparedness for intensifying climate risk, finding that only about one-third of organizations had an adaptation plan in place.

Done well, climate adaptation reduces climate risk and protects bottom lines. To do that, businesses and governments need visibility of exactly which climate risks they face, and when and how they’re likely to be affected. With this information it’s easy to identify which assets to redesign, relocate, retrofit, or, if necessary, divest from, building climate resilient communities, businesses and economies.

Decarbonization has – rightly - become a priority for many organizations in recent years. But reducing greenhouse gas emissions, although critical to avoiding the worst impacts of climate change in the medium to long term, doesn’t help us to prepare for the climate volatility that is already happening now. The world is already facing severe climate risks, and this will continue towards the end of this century, even under low-emission scenarios, says the IPCC.

The UN Environment Program’s Adaptation Gap Report says “Climate impacts are increasing across the globe. A multi-year drought in the Horn of Africa, unprecedented flooding in South Asia, and severe summer heat and record-breaking droughts across multiple regions of the northern hemisphere, among others, point to mounting and ever-increasing climate risks.” The economic costs of these risks are stark, and worsening. In 2022, weather and climate-related losses totaled USD313 billion. McKinsey estimates that trillions of dollars of economic activity and physical capital, and the world’s stock of natural capital, is already at risk from intensifying climate hazards. Warming this century could cost up to 51% of global GDP, warns another UCL study.

Climate adaptation is critical to minimizing future climate risk – but it also enables organizations to capitalize on emerging opportunities. From building robust supply chains and energy-saving retrofits to identifying locations with favorable conditions, climate adaptation offers major advantages to businesses taking action.

More and more companies in the UK, US and around the world are measuring, analyzing and reporting their climate risk, driven by regulatory push, market pull, or their own ESG strategies. The 11-point framework set out by the TCFD (Task Force on Climate-Related Financial Disclosures) requires organizations to scrutinize and report both their physical and transition risks – and how they plan to adapt to both. The 'strategy’ pillar– one of four TCFD framework pillars of risk reporting – asks organizations to identify climate-related risks and opportunities, as well as how the business is responding to these through its strategy, practices and financial planning. As investors, consumers and regulators increasingly demand transparency on climate risk, a robust adaptation strategy will become a cornerstone of every business plan.

Good climate adaptation is based on clear visibility of risk. It must:

• Be rooted in science-backed insights at an asset-relevant scale, to support macro, heat map-style analysis

• Respond to the likelihood of both climate shocks (such as heatwaves, flooding and wildfires) and stresses (like long-term rising temperatures and increased wind speeds)

• Ensure that assets can withstand single and interrelated climate hazards

• Consider risk across short-, medium and long-term time scales, and a range of possible emissions scenarios

• Take into account climate risk to both owned assets, as well as those relied upon, such as suppliers and utilities.

By definition, good adaptation must be based in irrefutable science and dynamic, decision-useful insights. At Cervest, we call this climate intelligence (CI), and it’s the basis of all good climate adaptation. Good adaptation isn’t a one-off task, but an ongoing process that puts CI at the core of every strategic and operational decision.

Business continuity, risk management, ESG and sustainability leaders are already using CI to support due diligence processes, identify weak links in their manufacturing and supply chains, and implement effective adaptation plans.

One global asset manager is using Cervest’s CI to help their clients pinpoint the greatest climate risks to their assets, and confidently take action to mitigate them. By calculating CVaR (Climate Value at Risk), they’re supporting financial teams to prioritize and allocate budget to retrofitting, relocating and purchasing assets.

Another environmental advisory services partner uses CI to quickly analyze climate risk across the of a real estate asset’s lifecycle. These advanced screening and reporting capabilities feed into adapting existing assets (e.g. retrofitting) and ensuring planned assets are constructed for climate resilience through the design and engineering processes.

Find out how more companies are using CI to make informed decisions in our ebook- powering action with climate intelligence

Not all climate adaptation efforts are created equal – some even exacerbate climate risk. UNEP warns that “adaptation actions remain largely incremental in nature, typically do not address future climate change, and may reinforce existing vulnerabilities or introduce new risks, particularly for the most vulnerable.” With so much value at stake, and adaptation spending predicted to reach USD500 billion a year by 2050, it’s critical that we get it right.

Maladaptation is the result of failed adaptation strategies which actually worsen the situation, says the University of Oxford’s Dr Lisa F. Schipper. Examples are all too easy to find: forests intended to sequester carbon planted in wildfire-prone locations which release more carbon than they’ve had a chance to remove, or sea walls erected to prevent coastal erosion which cause flooding of a different kind by preventing drainage of heavy rainfall.

For businesses, maladaptation might be an unintended consequence of trying to streamline supply chains to minimize exposure to climate risk across multiple fronts. “The last three decades of market liberalization have seen global supply chain networks become more centralized, consolidated, and integrated, in the pursuit of greater efficiency,” says the Stockholm Environment Institute. “[But] while this streamlining of supply chain networks has delivered considerable benefits to businesses and consumers, the efficiency gains came at the cost of some of the redundancies that provided buffers against external shocks and disruptions in the past.”

Whether adaptation efforts are merely inadequate or actively doing more harm than good, the cause is often the same, says Dr Schipper: poor planning. Robust planning is the foundation of strong adaptation – but how can businesses plan for their future in a climate that’s in flux?

“Creating effective climate adaptation strategies is only possible if governments and organizations understand climate-related risks at the level of individual assets they own, manage or rely upon,” says Cervest’s Dr Helen Beddow. But understanding climate risk at an asset level has been impossible until now. Climate data was simply too vast to synthesize, too challenging to model, and too complex to interpret.

Today, a combination of cutting-edge machine learning techniques and advances in climate science have made discovering, quantifying and acting on physical climate risk radically possible. This unprecedented climate intelligence allows decision makers to scan their individual assets, entire portfolios or supply chains to understand precisely where their vulnerabilities – and opportunities – are, across multiple timeframes, emissions scenarios and hazards. These insights can then be shared across businesses to inform effective adaptation strategies that protect balance sheets, now and in the future.

Backed by rigorous science, yet designed to be clear and actionable, CI offers an irrefutable, single source of truth that can be used to climate-align every business decision, from M&A to supply chain due diligence to building maintenance. It drives competitive advantage, from early visibility of opportunities to preferential insurance and finance options for enterprises carrying less climate risk.

Against a turbulent economic backdrop, lobbying for resources to be dedicated to climate adaptation is a challenge within many organizations. Yet the business case for adaptation’s outstanding ROI is crystal clear.

We’re already experiencing staggering economic losses: around USD343 billion in 2021 alone. Behind that figure are countless individual businesses sustaining sometimes catastrophic losses. “Adapting now is in our strong economic self-interest,” says the Global Commission on Adaptation, which estimates overall ROI in improved resilience to be between USD2 and USD10 for every USD1 spent, and in some cases even higher.

Without incorporating physical risk and adaptation into company strategies and initiatives, climate risk poses a huge threat to business profitability. Take droughts, which affected vast swathes of the world in 2022, including Europe, the US and China. These historic droughts caused direct physical damage to infrastructure, impacted energy and power networks, and disrupted supply chains. Even in less dramatically affected years, drought-related losses across the EU and UK are estimated at EUR9 billion annually.

The cost of failing to climate-proof assets is consistently underestimated by business owners. Calculating the true cost – and likelihood – of physical climate risk makes the ROI of adaptation even more self-evident. “Typically, owners only consider damages to the asset itself. However, the true costs… go much deeper, including both direct and indirect costs such as loss of use, business disruption, lower property values, and continued unreliability. Owners also need to consider potential damage to services that they depend on but do not control, such as the power grid and other utilities,” advises McKinsey. With this complete picture of the costs of inaction, adaptation looks like an increasingly critical investment.

Effective adaptation strategies are built on dynamic, decision-useful climate intelligence. The result of five years of research and development by a team of world-leading multidisciplinary experts, Cervest’s climate intelligence product EarthScan provides intelligence that drives confident, resilience-building decision-making.

For the first time, EarthScan offers a truly unified picture of climate risk, turning complex climate science into relevant, robust and actionable insights. Use EarthScan to:

• Screen your entire portfolio and supply chain for climate-related risks and opportunities at the asset and portfolio level

• Assess physical climate risk across seven risk categories (including Heat Stress, Flooding, Drought, Precipitation, Wind Risk, Wildfire and Combined Physical Risk) and three IPCC climate scenarios between 1970 and 2100 in five-year time steps

• Translate physical risk metrics into direct financial costs with Climate Value at Risk insights (CVaR)

• Use globally standardized, comparable Cervest Ratings to prioritize asset-level risk adaptation and mitigation measures

• Generate report-ready, downloadable insights on physical climate risk for use in presentations, quarterly summaries, external disclosures and reports aligned against leading ESG frameworks, including the TCFD and EU Taxonomy

Cervest’s CI was created to catalyze adaptation at the speed and scale required to safeguard assets and businesses, communities and economies. It enables decision makers to discover, compare and share the climate risks facing their assets, and build targeted adaptation plans upon its insights. Ensuring that our assets are fit for future climate conditions is the foundation of business resilience in the short, medium and long term.

To find out more about how climate intelligence is shaping the future of organizations like yours, subscribe to our newsletter.