Physical Climate Risk and Firms’ Adaptation Strategy

How do firms adapt to the risks posed by climate change? Many studies have considered business adaptation to short-term shocks and business cycles, but few have investigated risks that resemble those posed by climate change: long-term, systemic, and irreversible. 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, how, and under which conditions firms adapt to physical climate risk. I find that firms take a targeted approach to adaptation – responding more to those aspects of climate risk that are likely to affect them directly. I show that firms with better environmental and social performance ratings are more responsive to varying climate risks. I then report evidence that perception and capabilities may provide the mechanism for different adaptation rates