Why investing in resilience is good for business
I have spent a substantial part of my career promoting business action to combat climate change, without hearing much about “climate adaptation and resilience.”
D espite the fact that Covid-19 has made us all painfully aware of how sensitive and unprepared our societies are to systemic shocks, we don’t seem to focus much on the effects of the huge systemic impact that climate change will have on our society.
Climate change is already visibly affecting companies, causing increasingly serious risks to infrastructure, supply chains, policy response uncertainty and the disruption of markets.
But while corporate ambition on climate mitigation is on the rise, most companies are still at the start of their journey on climate resilience and adaptation. Progressive companies are committing to carbon emission reductions and net zero carbon targets, but few are strategically addressing the irrevocable truth that rising temperatures will have a significant impact on their business models and wider society.
The key question is why? And why aren’t investors and other stakeholders challenging companies more on how they plan to adapt and build resilience to a much warmer and more unpredictable world?
It is clear that a lot of solutions will need to be found by business to enable us all to live in environments which will be significantly warmer and substantially more unpredictable than they are today. This has serious implications for infrastructure, energy use, public health and so much more. What, for example, will be the effects of hundreds of millions of people in coastal cities being forced from their homes? Similarly, it is clear that feeding a growing world population will be become more challenging as the effects of climate change kick in. We expect to see climate change depressing growth in agricultural yields by 30% by 2050. Once again this has huge systemic geo-political and economic implications.
The business case for investing in climate adaptation
In the World Economic Forum’s Global Risk Report 2020, climate related threats dominate the top five long term risks by likelihood and impact.
Much of the risks are linked to corporate supply-chains. CDPs report “closing the gap” showed that 76% of the suppliers responding to the survey had identified climate change risks that had the potential to generate substantive changes in their business. With 80% of global trade passing through supply chains annually, according to UNGC, the climate related risks to corporate supply chains are considerable.
Investors are starting to demand information about the climate-related physical risks in companies’ operations and supply chains, but more strategic questions on resilience and adaptation still seem to be rare. The Task Force on Climate Related Financial Disclosures (TCFD) is emerging as a helpful standard framework for climate-related disclosure, helping companies to identify the financial implications of physical and transitional climate-related risks.
Opportunities on the horizon
However, we should not only see climate adaptation and resilience through the lens of corporate risk management. The transition required will create new markets and unlock new economic opportunities.
The Global Commission on Adaptation estimates that the overall rate of return on investments in improved resilience is very high, with benefit-cost ratios ranging from 2:1 to 10:1, and that investing $1.8 trillion globally in five areas could unlock benefits worth $7.1 trillion from now until 2030.
Image by Global Commission on Adaptation
The increasingly urgent need to adapt and build resilience will undoubtedly inspire innovation in many areas as varied as floating urban development, storm-proof affordable housing, heat-resistant building material, resilient water and sanitation systems, flood and drought management, digital technologies for disaster risk prevention, drought-resistant crops, low-drip irrigation or new insurance schemes.
Interesting innovative business solutions are starting to emerge, and we need to find ways to replicate and scale these up. We also need to find ways to substantially increase investment flows into new technologies which will allow us to rapidly adapt our society to a changing climate and build up our resilience.
Overcoming barriers
There are three main reasons why private investments in climate adaptation and resilience still aren’t flowing at the pace and scale required.
1. Lack of clear metrics and science-based targets
We still lack clear metrics or science-based targets that can be broken down into sector or company targets, milestones and action.
2. Less developed business cases and finance models
The business case and return on investment models for resilience and adaptation projects are suffering from a lack of understanding of the risks and a lack of access to the information needed to asses risk. We are also weak on convincing blended finance models, concessional loans, guarantees and other tools.
3. Lack of public-private collaboration
Systemic change requires collaboration and partnerships of the kind we have in the mitigation space, which is still rare in the resilience and adaptation area. We need to find ways to converge on language and definitions, what needs to be done and roadmaps to success.
These gaps require action from governments, international organisations and the private sector, both individually and collectively.
Efforts to address these gaps are being scaled up in the public space. An example is the new international organization hosted by the Netherlands, the Global Center on Adaptation (GCA).
GCA will play an essential role in efforts to adapt to the global climate emergency, functioning as a solutions broker to accelerate, innovate and scale adaptation action for a climate resilient world and support government action in this space, as exemplified in a recent policy brief on building climate and pandemic resilience in Africa.
The journey towards climate resilience
While it is understandable that mitigating climate change impacts has been the ‘political’ priority, it is evident that climate adaptation and resilience now requires increased focus and that early movers will benefit most, given the accelerated pace of global warming.
There is a business imperative to take action by:
- Ensuring operations and value-chains are climate resilient: develop a more holistic picture of value chain climate risks, identify opportunities to build resilience in operations and supply chains, and adopt resilience strategies. Each region, market and industry will face unique exposure to the impacts of climate change, so the risks need to be explored accordingly and in the context of underlying vulnerabilities.
- Supporting communities’ climate resilience: move beyond responses to extreme weather events and supply chain disruption and consider relationships and interdependencies beyond the company itself. By working to ensure the resilience and adaptive capacity across the communities in which companies operate, especially low-income communities, businesses can demonstrate that they are trusted partners for key stakeholders.
- Contributing to innovative solutions and systemic change: The societal need for adaptation and resilience offer new market opportunities to contribute technologies and expertise to wider societal transformative efforts. Progressive companies which already have solid climate resilience strategies and innovative solutions to address these challenges have first mover advantages.
Even with a major step up in our levels of ambition to reduce greenhouse gas emissions, it is evident that we cannot avoid all the consequences of climate change. We need to adapt to rapidly changing climatic conditions, building the resilience of society.
The role of business in leveraging its innovative capacity, technology and reach will be critical to achieve the scale and pace required.
There is a real business imperative for companies to pay more attention to building resilience both for their own company and for the world.
Successful company strategies on climate change links mitigation, adaptation and resilience, addressing all material challenges in a systemic approach. If a business makes progress in its mitigation efforts, it becomes less vulnerable to disruptive risks such resource scarcity or adverse market developments. Climate change, nature degradation, biodiversity decline, water scarcity, are all interconnected, and best addressed simultaneously.
However, businesses cannot achieve the pace and scale needed on their own. It is essential that governments simultaneously scale up their efforts to provide long-term policies that give the clarity and confidence needed for companies to invest at scale in technologies for a climate resilient and adaptive zero-carbon future.
It will take all of our collective effort and unwavering determination to save our world for future generations. The private sector has a critical role to play.
The ideas presented in this article aim to inspire adaptation action – they are the views of the author and do not necessarily reflect those of the Global Center on Adaptation.
