Building climate resilience: Toward a practical corporate framework

The physical risks of climate change, including heat, drought, hurricanes, floods, and other perils, are rising, with widening social and economic costs that companies, governments, and consumers need to prepare for. Given the significant financial risks that climate change poses to business operations and supply chains, we believe companies have a vested interest in assessing and managing those risks. In our view, companies that build resilience can potentially increase their long-term investment value, decrease costs of capital, and fortify economic lifelines against rising climate perils.

We believe an effective, sustainable approach to managing climate risk entails adapting and building resilience to systemically prepare for increasing climate uncertainty. Adaptation refers to discrete solutions that enable households, companies, or communities to protect themselves from expected and defined physical climate changes. Adaptive solutions are financed and executed according to current projections for expected climate change, including, for example, meters of sea-level rise or the probability of a Category 5 hurricane. Climate resilience encompasses adaptation, but ultimately is broader. Resilience also includes structural transformation measures that enable entire systems to prepare for, manage, and recover from increasingly uncertain climate-related impacts over time, regardless of their eventual timing or severity.

In this paper, we describe the accelerating climate-risk environment, explain what we mean by climate resilience, and present a practical framework to help companies enhance resilience in their own operations and the broader systems in which they operate. Finally, we illustrate the practical application of this framework through case studies for an industry at the forefront of climate resilience: electric utilities.

The worsening climate-risk landscape 

Given projections of worsening physical climate risks, the need for greater climate resilience measures is clear. Average global temperature rise has accelerated over the past few decades, with no sign of slowing, and the frequency and intensity of extreme weather has increased, wreaking economic havoc. A few of countless recent examples follow:

• In 2022, floods in Pakistan, caused by heavy monsoon rains that followed a brutal heat wave, killed nearly 1,400 people, displaced at least 33 million, caused tens of billions of dollars in damages, and threatened to severely disrupt the agricultural planting season.¹ 
• Since 2017, the US has experienced an average of 17.8 climate events per year, each causing at least US$1 billion in damage.² 
• In the EU, total economic losses from weather- and climate-related events from 1980 – 2020 were between €450 and €520 billion.³ 
• In 2020, flooding in Asia affected 50 million people and resulted in more than 5,000 fatalities. Estimated losses were US$238 billion in China, US$87 billion in India, and US$83 billion in Japan.⁴

As temperatures continue to climb, research also shows that we are edging closer and closer to “tipping points” in the Earth’s system — points beyond which small incremental changes could trigger large-scale, potentially cascading — and unstoppable — changes across our atmosphere, carbon cycles, and terrestrial, marine, and freshwater ecosystems.⁵ The Amazon rainforest and Arctic permafrost, for example, are massive carbon sinks, trapping hundreds of billions of tons of CO2 in soil, vegetation, and ice.⁶ Once a certain percentage of those areas is lost, the amount of gas released could shoot the world past the temperature targets set by the Intergovernmental Panel on Climate Change (IPCC), with existential threats to human health and well-being. 

Beyond these tipping points, scientific uncertainty jumps as well, as climate models cannot project or quantify the outcomes. Against this backdrop of increasing instability and uncertainty, the need for climate resilience becomes clear. It is not enough to mitigate or adapt to known or expected climate risks. The world will need to become more resilient to unexpected (and potentially inevitable) changes in the natural world — or risk facing economic losses on an unprecedented scale. And while the effects of biodiversity loss are beyond the scope of this paper, the connections between climate change and ecosystem viability are clear, as are the enormous potential value-chain risks to many economic sectors. Preparing for uncertainty is now part of the financial equation.

Enhancing climate resilience 

The IPCC defines climate adaptation as “the process of adjustment to actual or expected climate and its effects, in order to moderate harm or exploit beneficial opportunities.”⁷ The panel further distinguishes climate resilience as “the ability of a system and its component parts to anticipate, absorb, accommodate, or recover from the effects of a potentially hazardous event in a timely and efficient manner, including through the preservation, restoration, or improvement of its essential basic structures and functions.”⁸ This distinction is important, because as climate change worsens, uncertainty increases. In other words, adaptive measures based on current climate projections may not be enough to protect life and property. Proactive resiliency is key.

The concept of resilience emerged from ecology, engineering, and child psychology in the 1970s. It has since carried over to other fields, including international development, health care, agriculture, community planning, and disaster management. Traditionally, resilience refers to the capacity for operational continuity during an event, and recovery soon afterward. More contemporary definitions include the ability to manage change, whether gradual or abrupt; predictable or surprising. In that vein, we see climate resilience as the capacity of a system to not only minimize and recover from climate shocks, but also to learn from those shocks and transform itself in preparation for future risks.

Toward a climate-resilience framework

We modeled the resilience approach outlined in this paper on one developed by the World Business Council for Sustainable Development (WBCSD) in two white papers, “Building long-term business resilience” in 2020 and “Business climate resilience: Thriving through transformation” in 2019. The WBCSD explores how companies can establish resilience attributes, which it defines as diversity of operations, modularity, cohesion, and adaptability. While not an exhaustive list of resilience principles, we believe these concepts form a good base for discussing how companies can enhance and operationalize climate resilience.

Diversity of operations
Operational diversity — sometimes referred to as redundancy — provides a system with flexibility, including the ability to respond in multiple ways to systemic changes and shocks.⁹ By diversifying and creating redundancy in operations, entities may find pathways to innovative problem solving and eliminate single points of failure. Economic specialization or highly concentrated supply chains can erode operational diversification and increase risk. Companies seeking to diversify their operations can potentially do so by:

• Establishing operations or warehouses in multiple locations
• Maintaining a regionally diverse supply chain
• Building redundancy into operations to be prepared in the event of climate-related stoppages
• Diversifying revenue sources, either by geography or business activity

Modularity
Modularity is “the degree to which a system’s components can be separated and recombined.”¹⁰ Modularity requires a system to be both open and connected, with parts of a whole that can operate autonomously; ramping up production in one area, for instance, when operations in another area must be temporarily suspended. Companies can integrate modularity by: 

• Analyzing interdependencies across the value chain and minimizing weak points that could disrupt or halt operations
• Increasing transparency, collaboration, and interconnectedness of information among business units and value chains
• Adopting disaster-preparedness plans to ensure seamless operations during and after a climate event

Toward systemic climate resiliency 

Because climate change is a shared risk — not unlike a global pandemic — society will need a broad-based, systemic approach to climate resilience. While some parts of the world, most notably equatorial regions, will experience outsized effects of climate volatility, very few countries or companies are immune. In our interconnected world, businesses operate with global supply chains and governments rely on one another for food, raw materials, technology components, pharmaceutical inputs, consumer goods, and tourism. A climate crisis in one region (for example, a crop-killing heat wave in a wheat-exporting country or drought in a semiconductor manufacturing hub) will have extensive spillover effects across regions and sectors. The world is socially and economically integrated, so building systemic climate resilience is essential.

After Superstorm Sandy in 2012, a few buildings in New York City, notably the headquarters of one prominent Wall Street firm, stood out in the Manhattan skyline as still lit up and operating in the storm’s immediate aftermath. In 2018, a single waterfront home on a segment of Mexico Beach, Florida, withstood Hurricane Michael. As impressive as the resilience of these structures was in these climate events, the surrounding systems failed. Employees in the operational building could not get to work. Homeowners of houses that survived were left without a community or services. Most recently, while some Florida hospitals in the path of 2022’s Hurricane Ian avoided structural damage thanks to past investments in resilience, interruptions to local water and electricity service hampered their ability to operate following the storm. In all cases, the entities had achieved some degree of protection but suffered from a lack of systemic, community-level climate resilience.

Climate resilience case studies: Electric utilities

Electric utilities are, in many ways, the nexus for systemic climate resilience. If power-generation assets, substations, and transmission and distribution infrastructure cannot withstand the negative impacts of extreme weather and climate events, the consumers that rely on them suffer. During power outages or rolling blackouts, homes, businesses, and local governments (including emergency services), may be unable to function normally. Entities may be unable to run air conditioning during a heat wave or power water pumps during wildfires. Utilities — and the grids they operate on — will need to be able to function reliably and continuously during climate events, particularly when electricity loads spike. Innovations in energy storage and power-demand management will be key. In this section, we outline examples of electric utilities’ climate challenges and how the application of a climate-resilience framework could improve outcomes.

Modularity: Lessons from the first climate bankruptcy
In one of the most widely publicized examples of climate-related financial losses, Pacific Gas & Electric (PG&E), a power company based in California, was forced to file for bankruptcy because of its role in local wildfires. In November 2018, with fire conditions high, heavy winds threatened to topple PG&E’s aging power poles and ignite the dry forest floor below. The utility weighed issuing mandatory blackouts, known as public safety power shutoffs (PSPS), for 250,000 people in 19 counties. Fearing reprisals from angry customers, officials kept the power on. The wildfires caused US$30 billion in damages, destroyed entire towns, and killed more than 80 people. The California Department of Fire and Forestry Protection accused the company of failing to properly maintain and safeguard power lines, which exacerbated the fires. A federal judge concurred, and the company filed for bankruptcy in 2019.

In the ensuing years, PG&E and other California power companies improved fire-detection management, began undergrounding power lines, and modularized power shutoff systems. By sectionalizing power circuits, the utilities can issue PSPS for more targeted population segments, causing smaller, shorter service disruptions and keeping more customers safely up and running during a crisis.

Adaptability: Instituting climate governance
To build resilience, many electric utilities have created governance structures aimed at formalizing climate-specific leadership roles and responsibilities, creating policies and risk-management systems, and guiding climate-related decision making. One large US electric utility consortium has charged its board’s corporate governance committee with overseeing annual reviews of the company’s performance associated with extreme weather and resiliency. The company has also instituted a climate policy to formalize its approach to enhancing systemic climate resilience. To engage and empower employees on this mission, the company has partnered with an industry association to pilot climate change training with its infrastructure engineers and to solicit feedback from other workers on how to tailor extreme-weather training to various jobs.

Conclusion 

According to the WBCSD, “Climate risk is something we all face, no matter our geography, sector, or socioeconomic status. It is global in nature and will impact every single one of us in one way or another. Taking the appropriate steps to prepare and adapt will be critical for any business who wants to continue operating past 2050.”¹³ In addition to working with climate scientists at Woodwell Climate Research Center to study the effects of physical climate risks on financial markets, Wellington’s Climate Research Team frequently contributes to engagements with company boards and management teams. We believe business leaders need greater appreciation of the financial risks posed by climate change to their operations and supply chains. 

In our view, it is in companies’ best long-term financial interests to pursue robust climate resilience and establish credible, science-based transition plans. If more companies embrace the growing momentum to reduce greenhouse gas emissions at a pace and scale that exceeds current trends and pledged reductions, global resilience to climate risks may be attainable. A resilience framework that may offer practical guidance for companies seeking to enhance resilience of their own business model and the broader system in which they operate includes combining the concepts of diversity of operations, modularity, cohesion, and adaptability. 

Building climate resilience will require a holistic, systemic approach. Companies should consider their own operations and how they influence the systems in which they function, including communities, industries, and supply chains. As the WBCSD puts it, “To better prepare for future shocks, businesses must change and extend their view of long-term resilience. Critically, they must accept that a company’s resilience is not limited to what’s inside its four walls, but also encompasses ecosystems, communities, economies, the rule of law, effective governance and governments, and more.”¹⁴