As the warm weather enveloping London serves as a poignant reminder of summer’s benedictions, it also starkly contrasts with the troubling climate data emerging from various scientific sources. The Copernicus Climate Change Service recently reported that over the last 21 months, global temperatures have consistently exceeded 1.5°C above pre-industrial levels, underscoring an unsettling trend in climate change.

This upward trajectory in temperatures has sparked a crucial conversation around climate adaptation, compelling businesses to reassess their strategies with a sense of urgency. While many companies publicly acknowledge the risks posed by climate change, a significant disconnect remains. A survey conducted by the European Investment Bank revealed that while 66% of EU businesses recognised threats from climate impacts, only 22% had an adaptation strategy in place. This paradox raises questions about the cognitive biases influencing corporate decision-making.

Behavioural economists point to a variety of psychological factors at play. For instance, the “status quo bias” leaves organisations tethered to traditional practices, whilst “herding behaviour” discourages individual companies from taking bold steps unless their competitors do the same. Perhaps most notably, the “optimism bias” may lead business leaders to underestimate the likelihood of adverse outcomes, a concept articulated by the late Nobel laureate Daniel Kahneman, who noted that executives often exhibit a reluctance to confront uncomfortable realities.

Despite this disconcerting landscape, a growing number of voices within the financial sector are beginning to advocate for a robust investment in climate adaptation strategies. New research from the London Stock Exchange Group has illuminated a potential goldmine in this arena, indicating that companies whose operations are tied to adaptation solutions raked in revenue of $1 trillion last year. However, it is worth noting that these figures encompass a broad spectrum of businesses, many of which derive only a fraction of their income from climate resilience efforts; for instance, “green building” revenues alone accounted for $424 billion.

For investors interested in adaptation-focused opportunities, emerging start-ups are becoming more accessible, but larger investments in public markets remain fraught with complexity. Analysts at Jefferies constructed a portfolio of 115 publicly listed companies with significant exposure to adaptation solutions. Their findings revealed that while this group outperformed the iShares Global Clean Energy exchange-traded fund by 53% over the past five years, they approximately matched the broader MSCI World index. This lack of dramatic divergence hints at both the challenges in the adaptation sector and the overall volatility in clean energy investments.

The urgency surrounding climate adaptation is echoed by the European Commission’s heightened focus on the topic under the leadership of President Ursula von der Leyen. Tasked with developing a comprehensive policy package, the commission aims to expedite investment into resilience strategies that may prove less vulnerable to political pushback than energy transition spending. Notably, as disasters become increasingly commonplace—evidenced by the recent floods in Spain and wildfires in Los Angeles—government interventions may catalyse much-needed investment.

Furthermore, Sarah Kapnick, head of climate advisory at JPMorgan, posited that firms should view climate adaptation not merely as a protective measure, but as a strategic investment opportunity that can confer competitive advantages over time. Among those taking heed are electric utilities, particularly following past calamities like the 2019 bankruptcy of PG&E due to infrastructure failures contributing to wildfires. PG&E has now received a credit rating upgrade, a testament to its improved risk management practices.

As temperature anomalies become the new normal, businesses recognising the imperative of climate adaptation now stand at a crossroads—not just to mitigate risks but to seize lucrative opportunities. This evolving landscape serves both as a cautionary tale and a clarion call for decisive action, highlighting the need for strategic foresight in navigating the ever-warmer world ahead.

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Source: Noah Wire Services