Climate adaptation: nobody is exempt

It might come as little surprise that the summer of 2023 will go down in history as the hottest on record.¹ We’ve seen dangerous heatwaves in Europe, North America and Asia, wildfires in Canada and Greece, devastating flooding in Libya, and disastrous typhons in Asia.

However, the extreme climate events we’re experiencing today are happening in a world that’s 1.1°C above pre-industrial levels – much higher temperatures are expected in the years ahead.² Even if ambitions to limit global warming to 1.5°C are achieved, which is far from certain, we can expect even more severe climate hazards at this global temperature level.³

Counting the cost

Translating this into financial terms, the US National Oceanic and Atmospheric Administration estimated in September that this year’s 23 US weather disasters to date had caused at least $1 billion in damages; an all-time high.⁴

In Asia, extreme heat and flooding has been estimated to cost apparel-manufacturing companies $65 billion in lost earnings by the end of the decade.⁵ The four countries key to the industry’s value chain in Asia – Bangladesh, Vietnam, Cambodia and Pakistan – face a 22% drop in export earnings by 2030 and could see a further 69% reduction by 2050.⁶  

As the impacts of climate change become increasingly difficult to ignore, the importance of effective adaptation becomes more pressing. Beyond climate mitigation efforts, we must also adapt to the changing climate we already live in and from which nobody is exempt.

What do we mean by adaptation?

The IPCC defines climate adaptation as “the process of adjustment to actual or expected climate and its effects”.⁷

‘Adaptation’ and ‘resilience’ are often used interchangeably, and, while they are complementary concepts, there are important differences. Adaptation refers to a process or action that results in a better survivability in a new environment; resilience describes the capacity to anticipate and cope with shocks, and to recover from their impacts in a timely and efficient manner.⁸

Adopting resilience thinking within climate adaptation strategies encourages a shift from short-term, reactive approaches towards strategic planning that is long-term and transformative.⁸

Understanding climate risk: you can manage what you measure

A climate risk results from the interaction between hazard, vulnerability and exposure.⁹

Hazard¹⁰ X  Exposure¹¹ X  Vulnerability¹² = Risk¹³

E.g., Severe drought X pulp mill located in a water stressed area X the mill requires large quantities of water to operate = pulp mill operations are affected impacting productivity of paper and pulp company

Many companies have been underestimating the variety and severity of possible climate risks to their operations and supply chains. By understanding these risks and analysing them under different scenarios and time periods, companies can identify potential hazards and develop an effective adaptation and resilience strategy that could enhance preparation, response, and recovery capacities. This may well support in minimising climate impacts, avoiding business disruption – and in the worst case stranded assets – safeguarding their business and ensuring continuity.³

What are we doing about it?

Climate adaptation has been on our agenda since 2016, when LGIM’s flagship Climate Impact Pledge (CIP) was launched. To ramp up our expectations, our focus has now shifted from risk identification to demonstration of actions for physical climate change risk mitigation and adaptation.

The net-zero sector guides in the CIP ask two essential questions:

• Has the company analysed its business-model resilience to climate-related risks and opportunities using scenario analysis and disclosed how the output has influenced its strategy?
• Has the company analysed the physical climate risks to its assets, operations and value chain, including potential financial impacts and evidenced measures to mitigate or adapt to them?

A short answer of ‘yes’ based on mitigation measures such as enhancing emergency response plans and staying attuned to weather forecast is not sufficient. We need companies to ask themselves:

• How is your current business model resilient to potential hazards?
• Have you conducted climate-scenario analysis for physical risks referencing IEA’s ‘net zero by 2050 scenario’ or equivalent?
• Did you adopt a bottom-up physical climate scenario analysis covering all real assets (including owned and leased properties) and key suppliers? Were financial implications estimated?
• How have the results of scenario analysis influenced your strategy?
• Have you budgeted for mitigation and adaptation actions (i.e. CAPEX and OPEX)?
• Do measures identified aim to build adaptive capacity of the company to the physical climate risks it faces now and/or in the future? If so, how?
• Are shared resilience benefits for the communities and ecosystems where your physical assets are being considered? If so, how?

We hope to see increased preparedness of companies for short- and long-term climate-related risks by focusing on increasing their adaptation and resilience potential. They need to demonstrate action in analysing climate-related risks, identifying potential financial impacts, and disclosing the actions they will implement to mitigate, and adapt to, those risks. We want to see capital allocated to adaptation and resilience initiatives and solutions.

This is an area of focus for us, so keep an eye on these pages for more specifics around our expectations and our engagement strategy in the months ahead.

Sources

1. https://www.theguardian.com/world/2023/sep/06/summer-of-2023-hottest-recorded-in-wake-up-call-to-cut-carbon-emissions

2. IPCC 2023 AR6. https://www.ipcc.ch/report/ar6/syr/

3. Adaptation Gap Report; UNEP, 2022. Available at: https://www.unep.org/resources/adaptation-gap-report-2022

4. https://weather.com/news/climate/news/2023-09-11-billion-dollar-disasters-record-2023-august

5. Extreme heat and flooding could cost Asian apparel manufacturing hubs US$65 billion in earnings: study | News | Eco-Business | Asia Pacific

6. Higher Ground? Fashion’s Climate Breakdown | The ILR School (cornell.edu)

7. https://www.ipcc.ch/sr15/chapter/glossary/

8. What is the difference between climate change adaptation and resilience? LSE,2022. Available at: What is the difference between climate change adaptation and resilience? - Grantham Research Institute on climate change and the environment (lse.ac.uk)

9. Intergovernmental Panel on Climate Change (IPCC), Glossary — Global Warming of 1.5 ºC (ipcc.ch)

10. Hazard:  A physical climate-related event such as temperature increase, flooding, drought, a tropical cyclone or water stress.

11. Exposure: The potential scale of the impact. This largely depends on   locations and type of affected business assets (I.e. buildings, factories, resources, farmland, infrastructure, etc.) and people that could be affected by a hazard.

12. Vulnerability: is the propensity or predisposition to be adversely affected by a certain hazard (e.g. a food and beverage factory require a large quantities of water to operate).

13. IEA - https://www.iea.org/reports/climate-resilience-policy-indicator/climate-hazard-assessment