Investing in adaptation  

As the climate crisis worsens, its impacts felt across increasing swathes of society, businesses can’t just reduce their emissions and expect to escape unscathed. Zoe Huczok and Dr Albert Meige of Arthur D. Little’s Blue Shift Institute take us through the adaptation strategies available to companies facing climate risks such as water scarcity, flooding, sea level rises and soaring temperatures.

Climate change is already dramatically impacting the world around us, with businesses and society having to cope with the consequences of rising sea levels, diminishing freshwater availability, biodiversity loss, increased pests and extreme climate events.

Whatever happens in terms of emissions reduction, these geophysical and biological impacts are going to be widespread and large-scale. Taking a “+3°C by 2100” increase in temperature, based on one of the scenarios of the Intergovernmental Panel on Climate Change (IPCC) projection, will mean that, for example, over 500 cities and one billion people will be exposed to sea level rise by 2040-50 and that 1 in 4 people may live in a country affected by chronic shortages of freshwater by 2050.

Essentially, companies and society will need to adapt to a changing world, alongside their efforts to reduce emissions and achieve net zero targets. Unfortunately, while vital, climate change adaptation is complex, with an unpredictable future, highly variable impacts and a myriad of available technologies all making it difficult to plan for. Where should companies start and what should they invest in?

Arthur D. Little (ADL)’s Blue Shift Institute report, “We’re doomed, now what?”, aims to help businesses navigate this area. It has a triple focus, looking at adaptation, what companies should do, and how technology can help.

The complexity of adaptation investment

Deciding where to focus investment and development efforts for adaptation is difficult. There is no single solution that meets every need. At the same time, funding remains low — it is estimated that less than 10 per cent of all climate technology funding went to adaptation in 2020–2021.

Adding to this, the choice of adaptation solutions will be greatly affected by a range of uncertainties, such as market dynamics, regulation, consumer behaviour, and financial mechanisms. This complexity often leads to decision paralysis or, at least, an extended ‘wait and see’ philosophy.

Using projections to plan adaptation strategies

As we’ve seen, the geophysical and biological impacts of “+3°C by 2100” are certain and well-documented. This leads to consequences for businesses across four areas – sourcing raw materials, including water (source), manufacturing goods (make), protecting their sites and assets, such as from rising sea levels (protect) and finally selling to customers in a changing world (sell).

Alongside these certain impacts, businesses need to factor in four critical uncertainties: regulations, consumer behaviour shift, competitive pressure, and the availability of finance. These combine high potential impact and high uncertainty.

By considering each “on/off” combination of these four factors, we generated 24 future projections, of which five are the most plausible, differentiating, and technologically relevant:

• Green Communities — strong consumer behaviour shifts but limited finance. This is a resource-scarce world in which grassroots adaptation initiatives flourish, without large-scale projects.
• Lonely at the Top — no consumer behaviour shift but high competitive pressure. Adaptation is driven by global market leaders targeting affluent customers in a highly unequal, two-speed society.
• Wild Green West — strong finance but little regulation. This is characterised as creative chaos in which adaptation initiatives sprout everywhere, fuelled by private capital but lacking any regulatory backbone.
• Don’t Look Up — limited finance and no consumer behaviour shift. This is a pessimistic future in which neither customers nor financial institutions have adjusted to the new climate reality.
• Adaptation Surge — all variables favour adaptation. This is a relative utopia in which adaptation is the norm, resetting expectations and creating new markets and new needs.

Identifying both specific and no-regret technologies

Mapping these five projections against the four corporate challenges (source, make, protect and sell) allowed us to identify specific technologies that enable adaptation for each projection – such as solar-powered mini desalination plants for the Green Communities projection. We also created a short list of no-regret solutions (that will be relevant and helpful, whatever happens in the future), enabling technologies, and key capabilities detailed below that companies should consider. These no-regret actions, relevant for all projections and industries, include:

• Solutions — early warning systems, thermal comfort systems, geographic information systems (GIS) for site location, aerial drones for imaging, robots for maintenance and automation of production, and water efficiency and recycling systems
• Enabling technologies — sensing technologies, including Internet of Things (IoT), satellite imaging and remote sensing (including light detection and ranging, or LiDAR); digital twins and generative AI (GenAI) for simulation; and neural networks for prediction
• Underlying capabilities — data science, complex systems modelling, design for scarcity, responsive risk assessment and strong local partnerships

Driving change

To move forward, companies should focus on understanding their particular climate change issues and risks, putting suitable governance in place, establishing means of financing, and developing local partner ecosystems. They should focus on four key questions:

• How to predict? Decision makers should begin by creating their own global warming trajectory assumptions and identifying the most critical shaping factors. They need to conduct site-by-site assessments of potential risks, both acute and chronic, and pilot improved risk-monitoring and modelling approaches.
• How to decide? Businesses will need a suitable governance approach to oversee the adaptation agenda, which often stretches across several functions. Abilities to “think global, act local” and enhance customer listening are key.
• How to finance? Mobilising funding for adaptation requires updating financial metrics, including pricing climate-risk vulnerabilities in terms of damage to assets, production loss, and possible reputational effects. It may also involve the complex task of pricing positive externalities (productivity gains, employee retention) and potential market opportunities from adaptation (market share gains, or new product-market fit).
• How to build? Adaptation problems require local solutions, making it essential for businesses to develop local ecosystems of partners. Companies will have to accept longer timescales for adaptation investments.

Putting in place an effective adaptation strategy

The effectiveness of adaptation responses depends on a complex, and difficult to predict, set of high impact factors. For example, it is both very uncertain and very consequential whether consumers change habits, whether regulation is enacted, whether financial mechanisms are developed and funds unlocked, and whether large companies assume leadership in adaptation.

However, what is clear is that businesses need to act now if they are to adapt successfully to climate change, whether that involves safeguarding water supplies, protecting or moving manufacturing plants from flood-threatened areas or changing processes to become more water-efficient.

Acting now is vital for three reasons: climate change will happen, making responding a ‘no regret’ decision; it enables first movers to build competitive advantage; and, finally, many adaptation solutions have long implementation timescales, meaning benefits will potentially take years to be realised. Climate adaptation has to be central to business strategies if organisations are to thrive in a climate-impacted world.

To read the full report, visit the Arthur D. Little website

Authors:

Zoe Huczok and Dr Albert Meige are the manager and director of Arthur D. Little's Blue Shift institute.