Climate adaptation: are UK firms passing the buck?

The private sector has come to expect the government to lead the way on preparing for climate-related threats. What must change to prompt British business to take the initiative?

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Illustration: Sara Gelfgren

The climate crisis has already harmed nearly half (48%) of UK firms in some way, according to a survey of 1,500-plus business leaders in April by insurance broker Gallagher. Of these, 52% have felt the direct impacts of extreme weather events such as heatwaves and floods, 47% have incurred higher operating costs because of climate change and 39% have had their supply chains disrupted.

Perhaps the most surprising – and worrying – finding is that more than half (53%) of the respondents said they’d taken no action to mitigate such risks, despite routine claims that the climate crisis is a high-priority C-suite concern. A similar proportion (51%) considered it to be the government’s job to ensure that businesses are sufficiently adapted to meet the climate challenge. Only 16% agreed that firms should take full responsibility for preparing themselves.

As Gallagher’s MD of risk assessment, Neil Hodgson, puts it: “Businesses do not believe themselves to be responsible for protecting themselves against climate change, instead believing that government should prepare them. Despite widespread concern, many are failing to act.”

Why aren’t businesses acting on climate risk?

Research by the University of Cambridge Institute for Sustainability Leadership found much the same attitude last year. Its international survey revealed a belief among 82% of UK respondents that government policy should be pushing through the necessary climate adaptations. Fewer than half of them agreed that businesses could drive the required changes themselves, compared with 69% of their counterparts in the US, 76% in Japan and 93% in India.

Many factors may be at play here. These could include: a corporate culture that prioritises lavish boardroom rewards over the use of surpluses to improve operational resilience; the fact that senior executives are inevitably less invested in addressing threats to their business that might transpire long after they’ve departed; and, perhaps, a knowledge gap, with business leaders failing to grasp the science and/or know how to apply that knowledge. Their general assumption could be that the government understands all the relevant facts and can therefore come up with the appropriate solutions.

Hodgson observes that business leaders may be more likely to understand and manage risks such as cybercrime than they are to deal with “less tangible, more generalised risks associated with issues such as climate change”.

Why are we so bad at assessing risk?

Indeed, there is a strong psychological element to this, as Art Markman, professor of psychology and marketing at the University of Texas at Austin, explains.

“Just as individuals are, organisations are bad with probability, so they ignore all sorts of risks,” he says. “Their excuse is typically the same too: ‘There are more immediate threats, so we should focus on mitigating those first.’ That’s rather than the longer-term issues that might drive them out of business altogether. Businesses assume that the government will deal with those. A government won’t cover a business for a key employee leaving, for instance, but it typically will for having a factory on a floodplain. We’ve baked this psychology into our system.”

The UK government’s furlough scheme during the Covid crisis and its bail-outs for banks deemed too big to fail during the 2007-08 crash can be viewed as reasons why this psychology is baked in. Markman suggests that the climate crisis is an instance of Westminster’s need to strike the right balance between warning businesses that they must act to protect themselves and trying to bolster their confidence as the UK economy continues to falter.

How government is making business wake up to climate change

How is the government going about this? It’s opened a consultation on making net-zero transition plans mandatory for businesses, having seen the EU vote in favour of doing just that. And since last year, UK-listed firms have been required to cover climate risks in their annual reports.

There’s also been a push by the International Sustainability Standards Board – formed at COP26, the United Nations’ 2021 climate summit in Glasgow – to create globally consistent sustainability reporting standards. Meanwhile, the UN’s G77 group is calling for businesses to invest to adapt to the effects of climate change. In other words, broad pressure on the private sector to act is mounting.

Organisations are bad with probability, so they ignore all sorts of risks

While the proportion of UK firms that have conducted a climate-focused scenario analysis has increased since 2021, it’s still under half, reports Rob Doepel, EY’s managing partner for sustainability in the UK and Ireland. Those that have yet to do this task “aren’t getting a deep enough understanding of what’s happening”, he stresses, suggesting that they would be wise to rethink their priorities.

“When I speak to brands, I find that taking action to mitigate both physical and transition risk is top of their agendas, yet still not urgent enough relative to other issues – the energy crisis, high interest rates and the like,” Doepel says. “This is also a matter of time horizons. Some sectors simply aren’t very attuned to planning for the next 30 years. I wonder if businesses have become complacent in waiting for government to take the lead.”

Is it time to inject some positivity into the climate debate?

It is, of course, to be expected that business needs clear directions from the government or other authoritative sources on how to respond to climate risks. Such guidance might prove more effective if these were to highlight the potential business benefits of prompt and effective action, rather than talking endlessly about risk assessments and how climate change can only ever have negative impacts on all firms.

That’s the view of Tony Rooke, head of transition planning at the Glasgow Financial Alliance for Net Zero, a forum established in the run-up to COP26 for financial institutions to discuss their sector’s climate challenges.

He has observed “a mixed bag” in firms’ levels of responsiveness, depending on how they have “applied scenarios to assess the physical risk of their assets. Part of this is that some of their models haven’t been up to date, but the situation is improving all the time. History suggests that those that recognise an opportunity first can maximise it – and this transition is the greatest economic opportunity of all time.”

Everyone thinks climate change is someone else’s responsibility

Conveying a more positive message matters because, while many businesses are looking to the government for solutions, consumers and other stakeholders are looking to businesses. This dependency mindset seems pervasive: 66% of British consumers surveyed last year by the charity Waste & Resources Action Programme said that companies should be doing more to help them reduce their own carbon footprints.

Moreover, international research published in the 2023 Edelman Trust Barometer reveals that 68% of consumers expect CEOs to shape policy on climate change. Despite the many cases of greenwashing, business has become a more trusted institution than government and even the NGO sector, according to the report.

“Trust in public institutions everywhere is very low, so the level of trust in business looks better to many,” says David Victor, professor of innovation and public policy at the University of California, San Diego. “But that’s important, because there can’t be any serious climate action without the involvement of business and capital.”

He believes that businesses will be more motivated to act by the “concern that they will be regulated” than by the direct risks of climate change to their operations.

“Ultimately, the direction of travel will be shaped by government policy, because the kinds of consumer-facing exposures linked to the climate aren’t enough to change most companies’ behaviour,” Victor says. “But change has to come.”