Physical Climate Risk and Firms’ Adaptation Strategy

Physical climate risks increasingly impact firms. While scholars have investigated how firms mitigate their impact on climate change, we know little about how firms adapt to climate change. 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 this dataset, I examine whether, how, and under which conditions firms adapt to physical climate risks. I find that the average adaptation rate across firms and climate risk drivers is 23%. Firms are more likely to engage in risk management as opposed to business strategies. On average, firms facing higher climate risks are more likely to adapt and do so with a broader range of adaptation strategies (which include both risk management and business strategies). The impact of climate risks on firms’ adaptation strategies increases over time, particularly for business strategies. I further examine the mechanism and find that higher level of climate risk increases managers’ risk perceptions, which triggers them to increase their adaptation strategies.