Insights

Shifting from climate mitigation to adaptation & resilience

Building competitive advantage amid macro-level uncertainty

Mitigation, the act of curbing the severity of impacts, has long been the focus of corporate sustainability. These strategies, which often involve reducing greenhouse gas (GHG) emissions, using less fossil fuels and virgin raw materials, limiting harm to ecosystems, and more, are and should remain the primary lever for avoiding the most detrimental consequences of a warming planet.

However, as 2030 targets loom closer and our planet continues to change in unexpected ways, a new reality is emerging. Climate change, nature loss, and water scarcity are materially impacting businesses today, regardless of what mitigation strategies they have in place. For instance, extreme weather events are on the rise, with the past 2 years holding the record for billion-dollar disasters in the US. Ecosystem loss, a primary catalyst for pollinator decline, has already put over $500B in annual global crop production at risk. Both phenomena wreak havoc on businesses, economies, and communities alike.

The Earth’s natural systems are shifting. To operate and thrive in an environment that's constantly changing, businesses need adaptation and resilience strategies that support their longer-term mitigation efforts. Read on to learn why adaptation and resilience is paramount to sound business strategy and 4 steps to get started.

Why adaptation & resilience

Adapting to new trends and capitalizing on emerging opportunities is part of human nature. The unique challenge with climate change and nature loss is that the rapidly increasing severity and frequency of events puts the need for adaptation and resilience on an accelerated timeline.

This makes the case for developing a short- and long-term adaptation and resilience strategy even more critical. Companies that proactively adapt to macro-level planetary and economic uncertainty can capture value through:

A robust adaptation and resilience strategy helps you better manage and predict costs, such as the cost of energy under volatile conditions, the cost of water and other key commodities, the impact of supply chain constraints, and business interruption costs due to extreme weather events.

You could more readily answer questions like, if a critical port were damaged due to an extreme weather event, how would this impact quarterly and annual revenue? How many days of operational disruption can your business withstand?

For many businesses, the most existential threats to long-term business continuity occur in the value chain, often in the form of access to critical supplies or commodities.

The coffee industry, for example, is experiencing shifts in ideal sourcing regions due to changing weather patterns and lower crop yields from extreme droughts and floods. Supplementing corporate mitigation efforts with adaptation and resilience interventions allows you to identify pressing vulnerabilities and implement interventions (such as diversifying your supply of coffee growers or partnering to pilot precision irrigation technologies).

Given the novelty of the adaptation and resilience landscape and challenges quantifying financial returns, mitigation has historically claimed the lion's-share of investment dollars. However, as forward-thinking investors and corporations recognize that adaptation and resilience investments aren’t just about avoiding risk, that's starting to change. According to research from the World Economic Forum, adaptation measures, if done right, can deliver a return on investment (ROI) of over $40 for every $1 spent.

Diversifying infrastructure, suppliers, and other physical assets is the cornerstone of a good adaptation and resilience strategy. Companies that delay building protection against severe, business-altering changes risk not only outsized consequences when disaster strikes but also falling behind competitors who have already fortified their operations.

While there’s no silver bullet to solving wicked problems like climate change and nature loss, businesses can't rely on mitigation alone. They need strategies and technologies that can adapt to inherently changing systems and provide tangible solutions to future-proof their operations, our economies, and our communities now.

Steps to embrace adaptation and resilience planning

Connecting your operating theatre (physical assets, value chain, trade routes, and customers) to planetary change is critical to mitigating and adapting to inevitable disruptions. This is the very essence of adaptation and resilience planning. Here are 4 steps to get started:

1) Conduct an integrated risk assessment

First, assess physical climate, nature, and water risks against your operating theater. There’s no shortage of planetary risks that impact businesses, so be sure to leverage internal and external expertise to determine what matters most to your brand, such as a unique processing facility exposed to severe flooding risk or a critical commodity exposed to supply chain disruption.

Remember, our economic and planetary systems are dynamic – your risk assessment should be, too. Risks should be assessed quarterly, monthly, or even daily and model impacts across current and future scenarios.

A dynamic risk assessment is more than just a compliance exercise. It connects your company’s specific operating theatre to planetary change in near-real time, laying the foundation for developing meaningful interventions to material financial impacts.

Strategy in action – water risk: As a company with agrifood supply chains, say you’ve determined that water risk is a top concern for your business. In this step, you’ll want to uncover what specific commodities are most at risk based on where they’re grown and how water-intensive they are. You’ll also want to understand the nature of the risk. Is it physical risk (i.e., lower crop yields) from water shortage? Reputational risk from overburdening high-stress watersheds?

2) Quantify material financial impacts

Next, evaluate how the risks and opportunities you identified will financially impact your business today and in the future. This means going beyond low-medium-high and other basic qualitative indicators and quantifying risks in a way that’s financially meaningful to your CFO and executive decision-makers.

A good starting point is analyzing your operating and business interruption costs. How do the identified risks, such as extreme weather events and volatile energy prices, impact operating costs? How much revenue is at risk from prolonged business interruption, such as a supplier responsible for 90% of your raw materials shutting down from a flood? How does this translate to current and projected sales and business value at risk (BVaR)?

To answer these questions, you’ll need to access core internal business data from your inventory and sales systems, capital asset accounts, procurement systems, supplier databases, and more. These data should be combined with the right external datasets on physical environmental risks to create an advanced model of current and projected costs and revenue impacts.

The power of Spatial Finance technologies

Companies that want to create competitive advantage from macro environmental, economic, and political chaos are leveraging Spatial Finance in their adaptation and resilience strategies.

These emerging geospatial technologies map the connections between planetary change and political, financial, and economic activity. In conjunction with a thoughtful adaptation and resilience strategy, they can help you assess the vulnerability of physical assets and supply chains to environmental events and evaluate the risks and returns of location-based adaptation and resilience investments.

Strategy in action – water risk: Continuing with the water risk example from the first step, break down the financial impact of water shortage on your operating costs and analyze the potential impact of lost sales from business disruptions.

[Operating costs] If moderate drought lowers crop yields by 30%, how much more expensive would these commodities become? How much are you willing to reduce your profit margins?
[Business interruption] What if the drought was so extreme that these commodities are no longer available, or you simply cannot purchase the same quantities as before? How would this impact sales, and for how long?

3) Identify meaningful interventions

Now that you understand the financial implications of material risks and opportunities, develop a portfolio of potential intervention strategies. Then, compare the ROI, business case, and co-benefits of each strategy. What is the relative business value for each intervention across criteria like supply chain resilience, GHG reduction, water, nature, community impact, and new market opportunities?

Also, consider the timeframe, effort, and feasibility of implementing each strategy. Some interventions are more CapEx intensive but can be implemented right away (such as investing in wildfire-hardened infrastructure), whereas others require significant internal coordination and a long time horizon (such as diversifying your supplier base).

While interventions will be highly tailored to your unique business priorities, it’s best practice to have a diversified portfolio of strategies that blends varying timeframes, CapEx requirements, risk mitigation impacts, and levels of feasibility.

Strategy in action – water risk: In our water example, maybe you’ve determined that the best intervention strategy includes partnering with your highest-risk suppliers on water resilience initiatives like crop rotation and drought-resistant seeds and shifting to new growing regions more suitable for your commodities. These are both medium- to long-term strategies requiring substantial coordination and effort. Perhaps supplement your portfolio with a shorter-term intervention, such as integrating water-related risks into supplier site selection and procurement processes.

Cracked land from prolonged drought. Photo credit: iStock, piyaset

4) Identify creative ways to capture and implement opportunities

Implementing adaptation and resilience strategies often requires new financing models, business models, or partnerships. As an emerging field, there’s no playbook on how to implement interventions, and traditional ways of thinking, operating, and investing usually don’t apply. As with most wicked problems, the answer lies in collaboration.

Fundamentally, adaptation and resilience programs should be created in partnership with other stakeholders, whether that’s designing issue-specific pilots with your suppliers or coming together as an industry of corporate investors to develop a fund for a mutually beneficial technology.

Building financing models for adaptation and resilience can be particularly challenging, as the ROI of interventions isn’t always easily quantifiable. The key is to find ways to lower the upfront costs and share the benefits among all stakeholders.

Strategy in action – water risk: Adaptation and resilience initiatives to address water risk in the supply chain can be financially burdensome for any one corporation or supplier to take on alone. To reduce the collective burden, explore pre-competitive collaboration or cost-sharing structures with other brands commonly served by a particular high-risk commodity supplier.

Thriving in an ever-changing future

Our communities, businesses, and economies were built on the premise of a forever stable planetary system. However, the planet is changing, and companies can no longer operate with the belief that their industry won’t be impacted in some way. For many businesses and communities, the impacts of climate change, nature loss, and water scarcity are already here.

Developing a robust adaptation and resilience strategy, supported by emerging technologies like spatial finance, is crucial to unlocking competitive advantage in an uncertain world of planetary change and economic upheaval. While these investments are undeniably complex, the longer you delay, the more you’ll be impacted by increasingly volatile operating costs, loss of critical infrastructure, and detrimental revenue losses from prolonged business disruption.

Ready to take a more proactive approach to long-term business planning? Using technology-enabled Spatial Finance insights, our team can help you translate planetary change into business value at risk and develop go-forward adaptation strategies that position you to thrive in an uncertain world.

Get in touch to learn more

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