Physical Climate Risk and Firms’ Adaptation Strategy

83 Pages Posted: 29 Jun 2022 Last revised: 8 Jan 2024

See all articles by Xia Li

Xia Li

London Business School; Boston University - Questrom School of Business

Date Written: January 4, 2024

Abstract

How do firms adapt to the threats posed by climate change? Many studies have considered business adaptation to experienced changes or short-term shocks, but few have investigated anticipated changes that are long-term and systemic, such as those posed by physical climate exposure. In this paper, I build a novel dataset that compiles information on the adaptation strategies of publicly traded companies across the globe, and merge it with climate science data. Using these data, I examine whether and how firms adapt to physical exposures to climate change. I find that the average rate of adaptation across all firms and different types of climate exposures is only 23%. Firms take a targeted approach to adaptation—responding more to those aspects of climate exposure that are more salient to their business. I also find that the perceived impact of climate change is a mechanism through which firms’ climate exposures influence their adaptation strategies. In addition, firms’ ESG capabilities and long-term time horizon positively moderate the relationship between climate exposures and adaptation strategies.

Keywords: adaptation, firm strategy, climate change, environmental, social, corporate governance (ESG), capability

JEL Classification: Q54, M14, L21

Suggested Citation

Li, Xia, Physical Climate Risk and Firms’ Adaptation Strategy (January 4, 2024). Available at SSRN: https://ssrn.com/abstract=4143981 or http://dx.doi.org/10.2139/ssrn.4143981

Xia Li (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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