Investing in adaptive capacity: opportunities, risks and and firm behaviour

Abstract

Companies and other entities face a range of both threats and opportunities from climate change; this is not a matter of conjecture. The impacts of climate change will vary by company, industry and location. Adaptive capacity is a component of economic capital. Economic capital is the smallest amount that can be invested to insure the value of a firm's net assets against a loss in value relative to the risk-free investment of those net assets. The disclosure and reporting task under the adaptation framework sits squarely within the firm's corporate governance duties. Building adaptive capacity directly impacts asset values, depreciation, future insurance costs, expected losses and financing costs. Using the adaptation framework of West and Brereton (2013) as a guideline, firms can better consider the strengths and weaknesses of the various approaches for assessing adaptation options.