Center on Regulation and Markets Working Paper #7 April 2023

A new framework for

how firms can manage
climate risks
Sanjay Patnaik and Kira Fabrizio

This working paper is available online at: https://www.brookings.edu/series/center-on-regulation-and-markets-working-papers/

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 A New Framework for How Firms can Manage Climate

Risks

Sanjay Patnaik and Kira Fabrizio

Abstract

This study proposes a novel managerial framework for strategic management in response to

climate change that is based strongly on a risk-management perspective. We first argue that

climate change has unique characteristics that pose unprecedented challenges to firms and

managers. Our managerial framework then focuses on how firms can improve performance and

reduce future volatility of financial returns by (1) identifying the risks associated with climate

change, (2) assessing the climate risk impacts on the strategic objectives of the firm, (3) integrating

the risk assessment findings into strategic decision making, and (4) implementing measures to

mitigate the risks and exploit new opportunities. Each component of this Climate Risk Planning

framework is accompanied by a detailed discussion of the relevant theoretical foundations and is

illustrated with examples and suitable strategic decision-making tools.

Introduction

On November 30, 2015, the largest gathering of heads of state ever to attend a United Nations

meeting convened in Paris. 1 The reason for this unique summit of leaders was the desire to finalize

a global accord to combat the problem of climate change within the United Nations Framework

Convention on Climate Change (UNFCCC). In a groundbreaking display of unity, 195 countries

accepted the final climate agreement, paving the way for concerted international efforts to reduce

the emissions of greenhouse gases. 2 The commitments made by political leaders are based on

broad scientific consensus that anthropogenic greenhouse gas emissions are altering our planet’s

climate in unprecedented ways and are leading to rapid changes in long-standing climate patterns

around the world, 3 and global average temperature is increasing at a faster rate than had been

anticipated by many climate researchers. 4 As a result, climate change is widely expected to have

a fundamental, global impact on our economic, political, and social systems, and a growing

number of business and government leaders are openly acknowledging that it will become one of

the most significant “grand challenges” human civilization will face in the coming decades. 5 This

development has especially profound ramifications for firms as they are the major organizational

forms of economic activities in our society and face unique challenges from climate change due to

the variety of concurrent risks and stakeholder pressures it creates. 6

Not surprisingly, a growing number of leaders from the private and public sectors, from

civil society and the military are acknowledging the potentially dramatic threat to our current

economic and political systems presented by climate change. As Anthony Zinni, former head of

the US Central Command asserted: “We will pay for this one way or another. We will pay to

reduce greenhouse gas emissions today, and we’ll have to take an economic hit of some kind. Or

we will pay the price later in military terms. And that will involve human lives.” 7 The US military,

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an organization that is particularly skilled in the sophisticated assessment of risks, recently ordered

all of its commanders to incorporate climate change into all aspects of their decision-making to

increase “climate resilience” of the armed forces. 8 Specifically, in a report prepared by the

Department of Defense for the US Congress, the military stressed that “Global climate change will

aggravate problems such as poverty, social tensions, environmental degradation, ineffectual

leadership and weak political institutions that threaten stability in a number of countries.” 9 It

further emphasized that “the ability of the United States and other countries to cope with the risks

and implications of climate change requires monitoring, analysis and integration of those risks into

existing overall risk management measures, as appropriate for each combatant command.” 10

Similar arguments were made at the aforementioned historic UN climate conference in

Paris in 2015, which one of the authors of this paper attended to conduct field research. Several

world leaders, including UN Secretary General Ban-Ki Moon, US President Barack Obama and

German Chancellor Angela Merkel emphasized the risks climate change poses to all aspects of our

society and economic future. Although many of the speeches focused on macro-level risks to

countries and the global economy, many of the same risks are even more relevant for companies

and their operations. While 93% of publicly traded firms in the US (corresponding to $33.8 trillion

in market value) are confronted with direct or indirect risks from climate change, only 12% of

those companies have divulged those risks publicly. 11 Moreover, climate change is of particular

concern for investors, as the CEO of SASB stated, “Climate risk is real and embedded across a

portfolio, and as such, investors cannot diversify away from climate risk by divesting.” 12 Similarly,

only 28% of S&P Global 100 companies had conducted an evaluation of the impact of climate

change on their business and only 18% confirmed implementing specialized climate risk

assessments. 13 Despite the fact that only a small percentage of firms that face climate risks

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currently engage in sophisticated climate risk analyses, there is a growing demand—among

investors and managers—for formalized and systematic approaches that can help conceptualize

firms’ strategic responses to climate risks. As Brian Cahill, a managing director at Moody’s credit

rating agency put it: “there is a real hunger for knowledge” regarding climate change-induced risks

in the business community. 14

However, despite the increasingly salient effects of global climate change on companies

and the growing demand among managers and investors for knowledge on how to prepare for it,

strategic management scholars have largely neglected how firms and managers can respond

optimally to climate change-induced risks and how climate change will affect current business

models, firm strategy and performance. 15 Only a small number of recent articles explicitly discuss

climate change, 16 illustrating the lack of attention by business scholars to this important issue,

particularly from a risk management perspective. Moreover, prior work largely has not elevated

the unique characteristics of climate change that are the result of fundamental and unpredictable

changes in the natural environment on a scale humanity has not experienced before. 17 Climate

change presents an unprecedented combination of interdependent risks to firms, introduces high

levels of uncertainty along a variety of concurrent dimensions into the decision making process of

firms, and involves varied impacts that occur both immediately and over a much longer time

horizon than managers typically consider.

In our paper, we address this underexplored area of research by first delineating the unique

nature of climate change and the unprecedented challenges it will present to firms. Our managerial

“Climate Risk Planning” framework provides a conceptualization for how firms can assess climate

risks and respond to them, thereby developing a modified strategic approach that is centered on

integrating risk management. The framework is therefore firmly anchored in a risk management

4
perspective and captures the entire process for a company’s strategic response to climate change

(see Figure 1).

--- Please see Figure 1 ---

While many consulting firms such as McKinsey & Co. have published advice to

businesses on how to confront climate risk, including calling on businesses to create a

“comprehensive risk-management strategy,” our framework explores how exactly this strategy can

be implemented in various types of industries. 18 Climate risk-management cannot consist merely

of insufficient adaptation measures that are implemented after “normal” businesses decisions are

made. Specific implementation measures regarding climate risk-management must be fully

integrated into business decisions from the start. Indeed, while many corporations discuss climate

change as an abstract, unknown future problem, many do not incorporate climate risk into their

management practices yet.

At the center of this Climate Risk Planning framework lies the identification and strategic

assessment of climate risks, followed by the integration of risk analysis results into a firm’s

strategy decision making. The final step of the framework includes the implementation of strategic

measures carefully selected based on the risk analysis and integration activities, to mitigate the

climate risks the firm faces and to take advantage of new strategic opportunities. We argue that

these efforts will result in improved firm performance and reduced volatility of financial returns.

At each step of our framework, there is potential for firms to outperform their competitors (or

conversely fail to do so), starting with the degree to which a firm identifies and analyzes its

exposure to climate risks. Thus, our framework for firms’ strategic responses to climate change

depicts each element of how firms can address climate risks and explicates the variation in impacts

of climate change on firm performance.

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The Unique Strategic Challenge of Global Climate Change

“Climate change is unlike any other environmental problem, really unlike any other public policy

problem. It’s almost uniquely global, uniquely long-term, uniquely irreversible, and uniquely

uncertain – certainly unique in the combination of all four.” 19 This succinct assessment motivates

our argument that climate change poses a unique challenge not only to our society but also to firms

and managers, and their strategic decision making. Our proposed framework—while drawing on

existing managerial theories—encompasses a novel conceptualization of strategic management

that is adapted for a world shaped by climate change. In the following, we delineate the two main

reasons for why climate change requires a distinctive approach to strategic management: (1)

climate change—through its systemic nature—raises the complexity and interdependency of risks

companies face in an unparalleled manner and on a scale not experienced by human societies

before, and (2) climate change increases the levels of uncertainty in firms’ business environment

in an unprecedented way. Moreover, these two issues are compounded by the fact that the impacts

of climate change on firms occur with varied time horizons (e.g., climate risks manifest themselves

both in the short-term and over decades-long periods).

The complexity and interdependency of climate risks

First, climate change-induced risks have the potential to affect virtually every aspect of a

firm’s business environment concurrently, which stands in contrast to other risks—often more

narrow in scope—that companies usually face. As a report on climate change-related risks by

PricewaterhouseCoopers explains: “What is changing is the complexity of the risks, their

interdependence with other risks and the wide-reaching, contagious impact they have (e.g. global

price rises) … Often overlooked, climate change adds to complexity. It amplifies or alters existing

risks, for example raw material availability (e.g. water, energy) or transport disruption due to

6
extreme weather events … So climate change is a ‘risk multiplier.’” 20 Consequently, firms will

have to incorporate the additional complexity of risks they will face because of climate change

into their strategic decision making. The systemic nature of climate change and the interdependent

risks it presents are presented in Figure 2 and captured in our strategic climate change risk matrix

depicted in Table 1.

--- Please see Figure 2 and Table 1 ---

We classify these interdependent climate change risks into three different categories that

act on two levels: the global level and the firm level. The first risk category encompasses the direct

physical effects of climate change on the natural environment of firms (field I in Table 1).

Examples of direct/physical risks on a global level include among others a rise in sea levels and

temperatures, increased flooding and droughts, more frequent extreme weather events (e.g., heat

waves, tropical storms, torrential rainfall, etc.), and higher humidity in the atmosphere. 21 These

risks translate directly to the firm level by, for instance, posing potential threats to firms’ physical

assets and existing production processes. For example, in 2016, Coca-Cola was forced to halt their

production of canned drinks in Namibia in response to the severe drought in southern Africa, 22 and

more recently American Airlines was forced to ground planes in Arizona due to extremely high

ground temperatures. 23 The effects of climate change on the natural environment then create and

magnify risks in our economic, political, and social systems, thereby becoming the root cause for

the two other main risk categories we identify: (1) value chain risks (field II in Table 1) and (2)

external stakeholder risks (field III in Table 1). For example, increased frequency of droughts may

increase pressure from community stakeholders, especially for firms that use substantial amounts

of fresh water. Similarly, climate change impacts might raise the likelihood of regulation, such as

7
carbon taxes and more unpredictable weather and frequent storms increase the disruption of supply

chains.

While we have classified these risks into three categories to emphasize that they act upon

multiple aspects of a firm, it is also important to note that in many cases, the risks in different sub-

categories are related and interdependent. As a result, climate change acts as a “risk multiplier” as

noted above, significantly exacerbating a variety of different risks. For example, product market

pressures can be a motivating factor influencing investor activism and regulatory changes can

affect energy and other input prices. The interdependencies are cross-cutting and multi-layered

such that there is a complex system of risks associated with climate change that have the potential

to affect all aspects of a firm’s operations and strategy.

The uncertainty caused by climate change

The second reason that climate change is a unique strategic challenge is that it introduces

very high levels of additional uncertainty into the strategic decision making of firms. 24 There are

three types of perceived uncertainty about a firm’s environment faced by managers: state

uncertainty (unpredictability about the relevant conditions in their firm’s competitive

environment), effect uncertainty (the inability to predict the impact that environmental changes

will have on their firm), and response uncertainty (lack of knowledge about the available responses

or their impact). 25 Importantly, climate change acts as a multiplier by increasing all three types of

uncertainty and reinforcing interactions between them.

The additional uncertainty will also make the assessment of climate risks more difficult,

because the world’s climate is a complicated system and trying to predict the exact locations and

timing of climate change-induced effects, therefore, proves challenging. 26 This is one reason why

climate scientists often provide a range of potential scenarios that model different possible

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consequences of climate change. 27 Because climate change affects the entire planet, the magnitude

of uncertainty faced by any given firm—which will depend on the industry and geographic

location—could significantly alter the decision criteria the firm has to consider when developing

its strategies.

For instance, as the frequency of severe floods is expected to grow in many parts of the

world, selecting the right location for key assets (such as production plants, logistics hubs, etc.)

will become much more critical. This task will be particularly complicated by the heightened

uncertainty about where and how often these floods might take place and will require more

sophisticated planning for contingencies. A recent example can be found in the devastating flood

that occurred in the state of Louisiana in the US in August 2016 due to unusually high levels of

rainfall. 28 An estimated 6,000 firms were impacted by the flood, resulting in up to US$5 billion in

economic damages for the private sector. 29 Many of the affected firms were not adequately

prepared (e.g., numerous businesses did not have flood insurance) due to the historic rarity of such

floods in the area. 30 However, although the flood was characterized as a 1-in-500-year event by

the US National Oceanic and Atmospheric Administration, it was the eighth extreme weather event

in the US that received this classification in a 12-month period. 31

Similarly, severe droughts can lead to the shortage of water for firms that depend on it. For

companies that rely on a steady supply of water for their operations (e.g., for electricity generation,

crop cultivation, industrial production), the expected rise of severe and prolonged droughts as a

result of climate change will raise uncertainty and pose additional challenges. The recent multi-

year drought in California that started in 2011 provides a powerful instance of the adverse effects

firms in a variety of industries can suffer from droughts, particularly with respect to their future

strategic planning. The strategic challenges firms can face include the reduced availability of

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resources for manufacturing processes, higher costs of production factors, uncertainty about the

availability of factor market inputs, a forced drop in output, and less reliable and more costly

energy (e.g., the Californian drought imposed additional costs of $1.4 billion on electricity

consumers from 2011 to 2014 due to a reduction in hydropower generation). 32 The future

uncertainty about the persistence, magnitude, and recurrence of such droughts due to climate

change exacerbates such strategic challenges for firms.

The increase in frequency and severity, and the underlying increase in uncertainty, are not

limited to floods and droughts but apply to all climate-related events, including severe storms,

winter storms, wildfires, and cyclones. 33 While there are forecasts of the increasing frequency of

such events across the board, the impacts will be location- and company-specific. As a recent

report on climate change by BlackRock, a prominent investment firm, points out, “The physical

effects of climate change are hard to model, and their impact is likely disparate across

geographies.” 34 (BlackRock has begun evaluating firms based on their climate change planning, a

necessary step towards ensuring that companies in their portfolio have at least considered climate

risk-management.) 35 The issue of higher uncertainty due to climate change is particularly relevant

in an increasingly global economy, where a larger share of firms rely on international supply

chains. Within this economic system, small, localized supply disruptions can reverberate

throughout global supply chains and negatively impact industry output around the world

negatively.

The uncertainty associated with climate change is not limited to the physical impacts of

climate change. Firms are facing increasing uncertainty about the other risk factors included in

Table 1, including regulations, technology, consumer preferences, and stakeholder action. While

these examples are far from all-encompassing, they illustrate that the uncertainty resulting from

10
climate change has the potential to fundamentally alter current business practices and strategic

firm behavior, a development for which many firms are ill-prepared. Moreover, while it can be

argued that firms have to deal with uncertainty on a daily basis and that there are market

mechanisms in place to help them address it, the unprecedented scope and magnitude of

uncertainty exceed the more specific and manageable uncertainties that strategic decision makers

are accustomed to addressing.

Finally, the challenges to strategic management posed by the systemic risk and

unprecedented levels of uncertainty climate change introduces are further compounded by the

varied time horizons of climate change impacts on firms, occurring both in the short-term and in

the long-term. While some impacts, such as increased droughts, temperatures, frequencies of

storms, carbon regulations, and some stakeholder action have already started to manifest

themselves, others, such as large scale consumer preference shifts and limited access to raw

materials, maybe years or even decades in the future. These varied time horizons, combined with

uncertainty of climate risk impacts, lead to challenges for strategic decision making, as typical

valuation and assessment models (e.g., net present value calculations) not only require assumptions

about when impacts will occur, but also substantially discount the distant future, potentially

leaving the firm unprepared for the effects of climate change. There are multiple reasons why

managerial decision-making sub-optimally discounts long term impacts, including managerial

opportunism, stock market short-termism, and a tendency for management to ignore issues where

they lack tangible, quantifiable impacts. 36

Currently, U.S. firms are not required to disclose information on climate-related risks in

any public financial statements or information regarding how they plan to integrate these risks into

their management framework. While an increasing number of public companies have chosen to

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disclose their exposure to climate risks in the past decade, this information varies widely. 37

However, in 2022, the Securities and Exchange Commission proposed a rule that would require

public companies to disclose decisions made by a corporation’s board and management regarding

climate-related risks and their risk-management process. 38 Specifically, the rule will require public

companies to disclose how they anticipate climate change will impact both specific line items as

well as the company’s business model. If finalized, these types of disclosures would allow for both

public access to comparable information across firms on their climate risk management practices

and encourage firms to further consider a Climate Risk Planning framework.

The aforementioned factors make climate change a unique challenge for managers and lead

to a lack of action on the part of managers, owing to cognitive biases in corporate decision

making. 39 In the following section, we present our novel framework for how firms can respond to

climate risks systematically to overcome the impact of some of these biases.

Strategic Management in the Age of Climate Change: A Risk-based

Framework

Risk management perspective

We derive a Climate Risk Planning framework for strategic management in response to climate

change that is organized around the analysis, integration, and mitigation of climate risks. We

develop the framework represented in Figure 1 to explain how the impact of climate change on

firm performance will depend on the actions taken by firms to systematically incorporate climate

change risks into their strategic decision-making process. Rather than consider risk management

efforts tangential to their main strategic efforts, firms that pursue successful strategic responses to

climate change will analyze climate risks in light of their competitive position and strategic goals,

and engrain the risk management approach deeply into their strategic decision making.

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Identification of climate change risks

The first step towards eventual integration of the climate change risks described in Table

1 into a firm’s strategy is the recognition and identification of these risks. The failure to take

measures to comprehensively identify climate risks could adversely affect firms’ performance and

future strategic direction. Unfortunately, even though many firms face climate risks, most firms

do not explicitly identify and quantify them. 40 Many managers fail to take account of the risks

because the risks are so widespread and systemic, and there is uncertainty about impacts and

timing.

Firms therefore often ignore these complex and multi-dimensional risks until they

experience the direct effects of climate change or are forced to comply with new regulation. Only

when faced with such a “triggering mechanism” will firms start devoting managerial attention and

resources to determine the urgency and feasibility of addressing the risk. 41 Climate change will

increase the number of ecological “surprises” that cause shocks to the economic system. 42 These

shocks in turn draw the attention of managers and stakeholders to the complex reality of future

strategic challenges for the firm, potentially leading them to invest in assessing and creating

strategies to deal with these challenges.

For example, extreme drought in Malaysia in 2014 led to water rationing (limiting use to

every other day) and increased electricity prices. Local glove manufacturers TopGlove Corp and

SuperMax Corp, two of the world’s largest rubber glove manufacturers, were faced with the choice

of reducing production or trucking in water at ten times the usual cost. 43 This forced the firms to

reassess their risk exposure caused by droughts, evaluate the water sources available at each

production facility, and pursue efforts to increase water and electricity efficiency. The same holds

for Coca Cola, which was forced to stop drawing ground water for use in its bottling plant that

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served most of Southern India in 2003 after dramatic community protests over water use

culminated in a court order. 44 After the significant disruption of production due to community

activism, Coca Cola instituted a widespread program to identify and assess water-related risks. As

these examples illustrate, responding only retroactively to “trigger events” brought about by

climate change can be detrimental for firm performance as it can force firms to implement sub-

optimal, reactive measures that disrupt their strategic objectives.

Firms that proactively collect information and monitor their climate change-related risk

exposure are be better positioned to respond. Firms facing competitive environments that are more

dynamic, uncertain, and “hostile” that conduct strategic analyses tend to be more successful. 45 On

the other hand, firms that fail to allocate resources to risk evaluation are be ill-prepared for the

climate risks that they face, and are more likely to pursue strategies that are vulnerable to disruption

by climate-related events. 46

Our framework proposes that firms proactively conduct a comprehensive identification of

climate risk exposure on a regular basis. Using the categorization provided in Table 1, firms can

collect the information necessary to identify the types of climate change-related risks to which

they are exposed, and quantify both the magnitude and likelihood of these risks. These risks will

vary across industries (risks faced by multinational oil companies are dramatically different than

packaged food makers and consulting firms) and across firms within an industry (due to

differences in location of assets, supply chain configuration, operating processes, stakeholder

relations, etc.). Because the risks affect various aspects of a given business, this process of risk

identification involves accessing information that is embedded across the company and consists of

more than simply aggregating information. The process must be coordinated and interactive,

ideally starting a conversation about climate risk across various functions within the firm. The

14
identification of climate risk exposure should then be viewed as an information gathering process,

initially not directly connected to resource allocation or personnel evaluation. At first, the goal

must be to begin to overcome the lack of attention, status quo bias, and organizational challenges

to generate a comprehensive understanding of the ways in which climate change will affect the

firm and use the results of this analysis to assess risk impact in the next step.

One example of a firm successfully identifying its long-term climate risk exposure is

AngloGold Ashanti, a South Africa mining company. In 2008, AngloGold commissioned a report

to assess parts of its business that could be at direct risk due to climate change, both within the

specific context of its mining operations and in the broader communities in which the company

operated. 47 The study found that the company’s mines were at risk of increased flooding and, in

turn, more landslides, while the mine workers would be prone to higher rates of exhaustion from

increased temperatures exacerbated by low ventilation in the mines. The study also found that the

company would incur increased energy costs in order to better cool the mine for workers, as well

as external costs to prevent infrastructure disintegration from the wetter climate in the local area.

Additionally, in other locations outside of South Africa in which AngloGold operates, increased

“human distress” as a result of more extreme local climate conditions was cited as a key threat to

employees involved in handling the company’s supply chain.

Although it is unclear how many of these changes AngloGold actually implemented,

identifying the climate risks is an essential first step for any business. AngloGold Ashanti was

early in assessing climate-specific risks to its business operation, and, since 2008, many of these

physical effects of climate change have borne out. Anglo American, which has a stake in

AngloGold Ashanti, cut its dividend in 2022 after intense rains reduced its platinum mining

capacity in South Africa. 48 49 Additionally, the mining industry as a whole has experienced a shift

15
in demand as businesses and countries shift away from fossil fuels toward renewable energies. 50

Climate change will cause decreased demand for coal and natural gas and increased demand for

cobalt, lithium, and nickel as electric batteries power more automobiles while renewable energy

processes such as solar photovoltaics (used in solar panels) will increase demand for raw materials

like silicon. 51 The mining industry will therefore transform, and quantifying the impact of these

industry- and firm-specific transition risks and opportunities for a business like AngloGold would

assist the company to create a long-term climate strategy in its business outlook.

Scentre Group is another example of a business that successfully identified the climate

risks it faces. Scentre Group is a shopping center company serving Australia and New Zealand. In

2018, the company assessed its portfolio using data from the Australian Bureau of Meteorology

and New Zealand Ministry for the Environment 2018 Climate Change Projections. 52 The company

found that its assets were at particularly high risk of extreme heat, floods, and flash rainfall. The

quantification of these risks using available data can be the first step toward making changes to a

firm’s asset portfolio.

Of course, these risks will look different for different sectors. From utility companies that

have to deal with the direct threats of climatic events that threaten the power grid and water supply,

to transportation companies that may have to invest in infrastructure more regularly as it degrades,

to manufacturing companies that may encounter distribution challenges and even shifting demand

for their products. 53

Strategic assessment of risk impact

The initial identification of exposure to the risks of climate change subsequently allows

firms to evaluate the impact these risks will have on them. This assessment involves a mapping of

16
risk exposure based on an understanding of the strategic objectives, resources and capabilities of

the firm.

--- Please see Table 2 ---

As noted above, companies should consider that exposure to climate change risks can vary

across firms and industries; there is no one size fits all solution. Table 2 provides an overview of

this variation, juxtaposing the level of vulnerability (high/low) with each type of climate risk. For

example, firms in polluting industries and those perceived as environmental laggards in their

industry face higher risks of stakeholder and investor activism demanding improved environmental

performance and disclosure, while firms in cleaner industries and those perceived as leaders in

environmental management will have lower risks from external stakeholders. Service industry

firms with little production or distribution infrastructure will face lower risk of climate-related

supply chain disruption, while global manufacturing and logistics firms with assets in vulnerable

geographic areas and a global infrastructure are highly exposed to these risks. Within a given

industry, physical, regulatory, stakeholder, and supply chain risk exposure will depend on the

geographic location of a firm’s productive assets and supply chain risk will further depend on

structure, organization, and ownership across the supply chain. Due to the variation of climate risk

impact across firms and industries, firms that want to conduct a thorough assessment of their

exposure will have to engage in a substantial information gathering process. Firms that fail to

gather comprehensive information on the impact of climate risks on each area of their company

will less accurately estimate the strategic vulnerability of their firm to climate change.

The environmental reporting non-profit Carbon Disclosure Project (CDP) issued a report

in 2019 that analyzed how international businesses were responding to climate change. 54 While

3,659 of the businesses included in the report identified being exposed to substantive climate-

17
related risks, only 2,185 companies provided potential financial impact figures, indicating that

more thorough information gathering and financial application analyses were significantly less

common.

One example area that will become more costly for businesses and require increased

investment is human labor. Specifically, companies that produce goods in already-warm climates

may have to adapt to worker productivity issues, with one study estimating that temperature

increases could cost the global economy $2 trillion by 2030, concentrated in hotter climates across

Africa and Asia. 55 A firm may have to conduct an initial evaluation of labor costs based on more

local projections of how these climatic events will impact its operations before turning to methods

to mitigate the risk. For example, increased temperatures may negatively affect worker health. 56

This will have different implications for different firms—a firm may find that it must incorporate

ventilation or cooling systems and offer more flexible work times for any employees doing manual

labor in these climates. Other companies may need to provide employees with filtering masks in

areas that are experiencing dust kickup as a result of extreme drought. 57 However, none of these

companies can implement these measures until they conduct full assessments of how the health of

their employees will be affected by climate change.

Still other companies may find that their labor costs will increase due to other necessary

measures like retraining programs. Civil engineering firms, for example, may need to invest in

training to reeducate employees on how to redesign structures to adapt to changing rain patterns,

with one civil engineer saying, “Our civil engineers haven’t been trained to deal with climate

change in their training. Our urban planners, our city managers, our architects. Nobody’s been

taught.” 58 However, none of these measures can be implemented unless a company first conducts

a full evaluation of how climatic events will impact its operation and its finances. Only after

18
conducting this type of risk evaluation can companies research and incorporate specific measures

necessary to act as a bulwark against climate threats.

Another consideration for firms when evaluating risk impact is that the same type of risk

can have different impacts on the strategic objectives of different firms as a company’s strategic

risk exposure depends on several factors, including the resources and capabilities of the firm

(including both static and dynamic capabilities), its strategic position within its industry, and the

industry structure it faces (See the “Strategic Assessment” box in Figure 1). First, the firm’s

resources and capabilities determine how effectively the firm can manage the risks. For example,

a firm with capabilities to manage access to critical inputs across multiple suppliers with flexible

supply schedules would be less impacted by climate change-induced supply shortages from a

subset of suppliers than a firm in the same industry that either relies on a few suppliers, relies on

suppliers that are co-located, or lacks the capabilities associated with flexible sourcing. Similarly,

firms that have already invested in developing resource efficiency programs in their production

facilities will experience a lower impact from energy price increases, or price increases from other

inputs. In addition to a firm’s static resource base, a firm’s dynamic capabilities also affect its level

of strategic risk exposure because they determine the firm’s ability to adjust and respond to climate

change risks. A firm that possesses dynamic capabilities that allow it to effectively accommodate

changes in customer demand, regulation, operations, or supply changes through innovation of

products and processes will be less negatively affected by climate change risks associated with

these factors. For example, in the agriculture industry, Bayer has invested in research to develop

drought-resistant crops. 59 In the utility sector, English company Anglican water invested in

interconnecting water supply zones to sure up water supply in areas particularly vulnerable to

drought. 60 To be effective, businesses must proactively fund research into these types of

19
innovations as a first step toward adapting their business models to the broader effects climate

change will have on the market.

A third factor for firms to consider is that their strategic risk exposure also depends on the

strategic position of the firm within its industry and core markets. For example, firms that depend

critically on brand reputation in their product market and possess a highly valuable global brand

will be at higher risk of stakeholder attacks targeting their brand reputation when stakeholder risks

are high compared to a less brand-intensive firm. Likewise, firms that compete primarily on low

prices will face greater exposure to input price increases that could affect them more than their

rivals.

Finally, the level of strategic risk exposure is also influenced by the competitive structure

of the firm’s industry. For example, a firm operating in a highly-concentrated industry with limited

rivalry will be better able to pass increases in supplier prices on to their customers, at least in the

short term, thus insulating it from input price volatility. Other firms, in highly competitive markets,

will not be able to pass on cost increases associated with input prices or any other costs associated

with climate change risks.

This law of economics plays out whenever firms face risk exposure. One salient example,

unrelated to climate change, of this was the global supply chain issues that surfaced during the

COVID-19 pandemic, which caused certain sectors to incur substantial risk. Supply chain shocks

that emerged in late 2020 accounted for a significant portion (one-third) of the strains in global

production networks. 61 Larger firms were largely able to pass on the costs associated with these

production strains to consumers due to consumers’ low price sensitivity in the market and less

competition. 62 This, in turn, strongly contributed to inflation for consumer goods. 63 The result was

that, in 2021, facing rising supply chain risks, large U.S. companies reaped the largest profit

20
margins since 1950. 64 On the other hand, in one survey 80% of small business owners in the U.S.

reported that the inflation that resulted from supply chain issues was cutting into profits in 2022,

likely because these businesses faced higher price sensitivity from consumers. 65 As climate risks

continue to grow and, with them, costs for businesses incurred by everything from supply chain

disruptions to production problems to the implementation of climate adaptation measures may

continue to drive a wedge between the profit margins of larger firms in less competitive markets

and smaller firms in more competitive markets.

Similarly, if there are low barriers to entry in the firm’s market, it provides an opportunity

for new entrants that are better suited to climate change-affected industry conditions, potentially

undermining the firm’s strategic position. Thus, industry structure can either insulate the firm from

strategic risk or further expose the firm to the underlying risk through the competitive dynamics

of the market.

Climate risk integration into strategic decision making

After a thorough strategic assessment of the climate risks facing the firm, our Climate Risk

Planning framework proposes that firms subsequently integrate climate change risks into their

strategies through the use of a variety of risk management tools. There are relevant tools developed

and discussed in the finance and operations management literature that can be leveraged to

contribute to the systematic integration of climate change risk into a firm’s strategic decision-

making. Table 3 provides an overview of the major tools and gives corresponding examples for

how each tool can assist in identifying and assessing climate change risks. We have categorized

the tools into those that are more suited to addressing one specific risk at a time and tools that can

be utilized to integrate information and assessment across all of the risks faced by the firm. These

tools can assist the organization in overcoming decision-making biases associated with climate

21
change-related uncertainty and varied time horizons. In particular, the integrative tools provide the

holistic approach necessary for systemic climate risk impacts.

--- Please see Table 3 ---

Most of the project-specific tools, including hedging, value-at-risk, insurance, and real

options, are typically applied in finance to evaluate the risk of a specific investment or project.

These tools can be useful for evaluating and responding to climate risks as well, and are most

powerful when utilized in conjunction with holistic risk assessment to further incorporate risk

analysis into the strategic management of the firm. We have also included supply chain

configuration as a tool to assess alternative supply chain structures for their exposure to a variety

of climate change-related risks. The more integrative tools, including scenario planning and

enterprise risk management (ERM), allow managers to assess the value of alternative strategic

options under multiple future scenarios of potential climate change effects or trace the impacts of

climate change throughout the organization.

ERM systems are particularly effective at helping managers integrate climate change risk

into a firm’s strategy. Such systems focus managerial attention on strategic uncertainties and guide

the development of new strategic initiatives. 66 For example, Nationwide Insurance implemented

an ERM system when risk management shifted from managing financial risks to also

encompassing operational risks. The ERM system allowed for the decentralized assessment and

integration of risks, allowing those managers who were closer to the risks to engage in quantifying

and planning for risk reduction. As a result of adopting this system, Nationwide was able to focus

on reducing and transferring risks where they did not have a competitive advantage (i.e. forecasting

market variables), and retaining strategic risks where the company had an advantage in terms of

22
risk assessment and bearing. 67 Thus, the implementation of the ERM system at Nationwide had a

substantial impact on the firm’s practices, investments, and activities.

Another example of a successful ERM implementation is Hydro One, a Canadian electric

utility company. The implementation of an ERM program at Hydro One brought new risk

assessment tools to the company, including the “Delphi Method,” 68 and facilitated the systematic

evaluation of risk trends and tolerances. The ERM system included an integrated process for

allocating capital and garnered a favorable reaction from credit rating agencies Moody’s and

Standard and Poor’s, reducing the cost of capital for the company. It has also heightened the

managers’ and employees’ awareness of risk management, ingraining the attitude that risk

management is “everyone’s responsibility.” 69 For both Hydro One and Nationwide, systematic

analysis and integration of risk allowed the companies to reduce or avoid risks that were of low

strategic value and make investments to manage recognized multidimensional risks associated

with strategic assets and activities.

These tools provide firms with the means to include climate change risks into strategic

decision-making regarding resource allocation, investments in product and process R&D, sourcing

of raw and intermediate inputs, as well as larger decisions about which markets to enter and how

to position their products in the marketplace. In some cases, climate risk assessment also presents

new opportunities to the firm. For example, expected increases in consumer demands for more

energy efficient products or products with less environmental impact might create markets in

which the firm could exploit existing or new capabilities. In other cases, climate risk assessment

will highlight the potential for possible disruptions, future cost increases, or demand reductions

that should be evaluated as part of the decision-making process. As a result, firms that pursue a

23
systematic approach to climate risk integration by deploying the appropriate tools are better

positioned to mitigate climate risks and subsequently outperform their competitors.

Mitigation of climate change risks

Our Climate Risk Planning framework proposes that, by integrating the relevant climate

risk analysis and impact assessment into a firm’s strategic decision-making, firms subsequently

reduce the vulnerability of their firms by taking advantage of new strategic opportunities. This

approach does not imply that firms avoid all investments and activities with climate change-related

risks. Instead, by systematically quantifying and evaluating the climate change risks associated

with strategic decisions, firms create a portfolio of assets, investments, activities, and decisions

that protects firm value and strategic objectives under multiple possible futures and risk

realizations. This could include both reducing investments in risky assets and activities and

promoting investments in proactive measures to better safeguard against the effects of climate

change.

The “right” set of mitigation investments will necessarily vary across firms, based on

differences in strategic risk exposure and strategic objectives. We provide specific examples of

actions that firms can take to mitigate climate change in each risk category in Table 4. We have

classified these mitigation actions into internally and externally-focused actions, depending on

whether they primarily target internal actors and processes (such as production processes, energy

efficiency, training, using an internal carbon price for investment decisions) or external factors

(such as supply chain redundancy, non-market strategy, and relocation of critical assets). For

example, energy-intensive firms in price sensitive product markets faced with likely increases in

electricity prices due to carbon regulation may elect to pursue more energy efficiency opportunities

or seek longer-term energy purchase contracts for renewable energy. Firms that depend on

24
securing a social license to operate and face exposure to more intense stakeholder or investor

activism may seek to develop capabilities around environmental reporting and disclosure and CEO

leadership on environmental issues. This can preemptively shape their relationship with

stakeholders instead of having the firm react to negative events.

--- Please see Table 4 ---

By pursuing such risk mitigation activities, firms can avoid investments and strategic

initiatives that carry an unacceptably high risk (relative to the expected benefits) and proactively

identify new investment opportunities that will increase in value as climate change impacts

progress. Moreover, firms may also invest in measures that mitigate risks that could potentially

compromise the firm’s core activities. Not only does this approach allow companies to

outmaneuver their competitors that fail to respond adequately to climate change risks, but it will

also better prepare them for climate change-induced shifts in their competitive environment.

Performance implications

The integration of climate change-related risk management and resulting investments in

mitigating exposure to climate change are expected to provide dual benefits for firm performance.

There is substantial literature that addresses the question of whether investments in sustainability

(of various types) increase firm performance. 70 This research focuses on whether environmental

(or social) performance is associated with financial performance outcomes. Based on a study of

the relationship between a firm’s releases of toxic chemicals and Tobin’s q as a measure of

financial performance, lower pollution is found to be associated with better financial

performance. 71 Similarly, among large publicly traded firms, those with lower levels of (legally)

emitted toxic chemicals have significantly higher market values, controlling for other factors that

enhance firm performance. 72 While these studies assess the relationship between environmental

25
management and firm performance more generally, we argue that climate change risk mitigation

integrating risk mitigation with strategic management also serve to improve financial performance.

Firms that design their strategies to consider climate change by utilizing a risk management

perspective will realize benefits from these strategies. This is consistent with the idea that the

relationship between environmental and financial performance depends on the firm’s

environmental management processes. 73 Directing sustainability investments toward the firm’s

most important areas of climate risks provides the greatest performance benefits, which will vary

across firms and industries. Accordingly, recent studies of the performance impact of sustainability

investments rely on a more nuanced measure by relating the sustainability investments to those

related to “material” issues and others, based on the Sustainability Accounting Standards Board’s

(SASB) industry-specific guidance on the materiality of various sustainability issues. Findings

suggest that while investments targeting issues material to the firm lead to increases in market

value, investments that target less material issues do not. In fact, firms that make the most

investments in the material issues and also make the least investments in immaterial issues achieve

superior performance. 74 This evidence points directly at the importance of thorough and holistic

climate risk assessment, integration, and mitigation. Investments guided by firms’ analysis of their

strategic risk exposure and mitigation efforts, rather than by less directed sustainability activities,

result in performance improvements.

Studies have also examined the impact of risk management practices themselves on firm

performance. A study of governance structures that promote risk management integration (such as

the presence of a chief risk officer, or “CRO,” and adequate channels of reporting to the CRO)

demonstrates that banks with stronger risk governance had higher stock returns and returns on

equity in the wake of the 2007/8 financial crisis. The study concludes that the benefits of a risk

26
management system (such as ERM), including a more optimal allocation of capital and a favorable

reaction from credit rating agencies, arguably reduce the cost of capital for the company. The same

was not true for other (non-risk-related) corporate governance attributes. 75

Similarly, environmental risk management is associated with lower cost of capital in major

U.S. firms. 76 As managers proactively and strategically manage stakeholder pressures, they enjoy

the support of important stakeholders (including customers, regulators, investors, and activists), in

turn reducing capital constraints and avoiding costly activist discontent. 77 Recent evidence further

indicates that adopting an ERM system increases firm value, 78 suggesting that if managers invest

in mitigation efforts guided by risk management systems, future financial performance will be

higher.

In addition, when managers take a holistic, portfolio approach to strategic decisions,

cognizant of the correlation of risks across activities and investments, the firm is less subject to

specific climate-related events, making its returns more stable and less volatile. A meta-analysis

of the relationship between risk management and volatility of returns found consistent evidence,

across multiple studies, that the use of risk management tools (in these studies, most often

derivatives and operational risk management practices) reduces risk exposure, volatility of returns

and sensitivity of returns to price volatility. 79 Proactive climate change risk assessment and

mitigation will decrease the volatility of returns by reducing exposure to uncertainty, e.g., in the

form of input prices, severe weather disruptions, shifts in consumer demand, and activism from

external shareholders. Therefore, firms that invest in climate change risk mitigation efforts guided

by a risk management approach will have less volatile financial returns over time.

27
Discussion and Conclusion

Man-made climate change is undoubtedly one of the most significant challenges humanity will

face in the coming decades and will have an outsized impact on firms and their strategic decision-

making. The unique nature of climate change poses unprecedented risks to firms, which we argue

have not yet been adequately captured by existing frameworks in strategic management. Our study

proposes a novel conceptualization of strategic management in response to climate change,

focused on a risk management perspective. As the effects of climate change become more apparent

and fundamentally alter the competitive environment of firms, our Climate Risk Planning

framework predicts that firms that do not incorporate the risks posed by climate change into their

strategies in a holistic way will be outmaneuvered by their competitors who do.

28
 Figures and Tables

Figure 1
Framework for strategic management in response to global climate change

Strategic Financial
Assessment of and
Risk Impact Strategic
(See Table 2): Climate
Resilience:
Resources & Integration of Action: Mitigation of
Identification
Capabilities Risk Analysis Climate Change Lower
of Climate (static and Volatility of
into Firm’s Risks and Taking Financial
Change Risks dynamic) Performance
Strategic Advantage of New
(See Figure 2
Strategic
Decision Making Strategic
and Table 1)
Position of (See Table 3) Opportunities Higher
the Firm Average
(See Table 4) Future
Financial
Industry Performance
Structure

29
 Figure 2
Identification of climate risks

Physical Climate
Change Risks

Firm

30
 Table 1
Climate change risk-matrix: level of risk vs. different types of risks

Risks from climate change

II – Value Chain Risks III – External Stakeholder Risks
I – Direct/
Risk Level Physical Risks Logistics/ Energy/ Product Market Political/ Stakeholder/ Human Resources/
Supply Chain Factor Market Prices Regulatory Activist / Investor Talent
Global • Higher • Global supply • Increased energy • Shifting • Political turmoil • Activist • Climate
effects temperatures chains become prices and higher customer and military movements change
• Higher frequency more unreliable supply volatility demands conflicts over against firms strategy as
of extreme due to potential • Higher and more towards low- scarce resources with large recruiting
weather events supply disruptions volatile factor carbon (e.g., water) carbon factor
(e.g. floods, • Certain geographic market prices products • Strict regulations footprints • Climate
droughts, tropical areas not viable for • Potential lack of • Low-carbon of greenhouse gas • Shift of refugee crises
storms, torrential transportation or availability of innovations emissions (e.g., investor • Different
rainfall etc.) location of assets certain resources/ from new carbon tax) preferences skillsets and
• Rising sea levels production entrants • Unfavorable away from training are
• Reduced water factors political highly demanded on
supply and snow environment for polluting the labor
cover polluting industries market
• Increased industries
atmospheric
humidity

Firm-level • Threat to physical • Bottlenecks in • Higher variable • Pressure to • Increased • Higher • Lack of
effects assets (e.g. supply chains costs for energy change political and scrutiny from available
production plants, • More frequent and raw materials product regulatory activists skilled talent
supply hubs, supply disruptions • Higher portfolio to uncertainty (potentially • Current
corporate • Higher managerial respond to (higher costs) costly skillset of
buildings) transportation uncertainty for customer • Potential campaigns employees
• Threat to costs sourcing raw demands relocation of from outdated
production • More rapidly materials and • Higher assets because of activists) • Higher costs
processes shifting suppliers production competition / military conflict • Higher costs for employee
factors lower • Higher costs for of capital recruitment,
profitability carbon-intensive • Reduced training and
operations due to availability of retention
carbon pricing capital

31
 Table 2
Strategic risk assessment: impact of risks differs across firms and industries

Risks from climate change

II – Value Chain Risks III – External Stakeholder Risks
I – Direct/
Risk Impact Physical Risks Logistics/ Energy/ Product Market Political/ Stakeholder/ Human Resources/
Supply Chain Factor Market Prices Regulatory Activist / Investor Talent
Low Impact • Critical • Duplicative • Highly efficient • Ability to • Reputation for • Reputation • Less reliance
production and supply chain in production innovate to favorable for favorable on human
distribution varied geographic process, meet and environmental environmental resources,
assets located in areas for key investments in exceed performance, performance more
less vulnerable components energy efficiency customer providing • Goodwill automation
geographic and closed loop demands goodwill with
locations manufacturing • Facing few • Lower stakeholders
• Innovative direct rivals in environmental • Industries
capabilities that product impact allowing with lower
can reduce market firm to meet new environmental
dependence on regulations at impact
specific inputs lower cost
High Impact • Key assets • Key suppliers • Energy intensive • Substitute • Firms in polluting • Firms in • Highly
located in located in relative to rivals products with and heavily industries dependent on
vulnerable vulnerable and substitutes lower regulated facing greater human
geographic areas geographic areas • Products that environmental industries stakeholder resources
(e.g., in coastal • Complex supply depend on inputs impact • Firms with a scrutiny • R&D intensive
cities, flood- chain that are sourced • Non-essential large carbon • Prior firms
prone areas) • Reliant on unique from products footprint, environmental
• Manufacturing supplier located geographically • Large especially relative disaster
and logistics in vulnerable area concentrated incumbents to industry rivals • Investors with
companies. for key suppliers not investing preferences
• Multinational component • Agricultural firms in product for more
firms with • Customers • Food processing R&D sustainable
global assets, demanding just- firms operations
heavily reliant in-time delivery
on multiple
transfers of
intermediate
goods

32
 Table 3
Tools for risk integration

Tool Uses Brief Description Example

Tools that can address risks one-by-one
Data analysis - Identify risks, trends. Collecting and analyzing data on relevant trends, such as storms, Munich RE, one of the largest re-insurance companies in the world, began
- Inform calculations with energy prices, regulation, and customer demands. Trends collecting and analyzing climate and weather data in the mid-1970s.
projected probabilities, themselves may indicate growing risks. Forecasting techniques can Throughout the 1980s and 1990s, the company was able to use these data
forecast loss magnitudes. project trends into the future to guide and inform analysis of risk. to identify trends in the frequency and costliness of weather-related losses
in significant detail, and utilize the updated probabilities and magnitude in
their risk models. 80
Hedging - Manage risk by making Hedging strategies in finance involve engaging financial A highly energy-intensive manufacturing firm concerned about the future
investments to reduce the instruments, such as derivatives and options, to reduce the volatility of energy prices, due to anticipated but uncertain carbon
downside risk associated downside risk of loss associated with a particular investment. For reduction policies, may seek to secure futures contracts that provide energy
with other investments, climate change related risks, hedging is based on the same at a future date at a specific price. Or uncertainty associated with physical
activities, or assets. fundamental concept of hedging the risk associated with one climate risk in different locations may lead a firm to hedge the risk of
investment by making another investment with a different impacts in one location by also seeking to place operational assets in a
(negatively correlated) risk profile in order to reduce the probability second location with a very different risk profile. Or the risk associated
or magnitude of loss in the aggregate. 81 with shifts in technological competition might be addressed by making
simultaneous investments in a number of technologies (e.g. electric
vehicles and internal combustion engines).
Value-at-risk - Quantify monetary Estimating the so-called value-at-risk can be used for climate risk VaR framework can be used to estimate the value at risk from climate
exposure to climate analysis and is widely deployed in the financial industry. The basic change impacts of varying severity in the global economy. Such an
change risk for specific idea is to calculate the maximum potential loss at a pre-determined estimate concluded that the expected VaR under common climate
projects or facilities. probability for a certain (financial) position during a certain time projections is US$2.5 trillion, while the 99th percentile climate change
period. For instance, a manager could calculate the maximum VaR is US$24.2 trillion. 83 Aviva, an insurance and investment firm based
potential losses associated with the destruction of a manufacturing in the U.K., commissioned a report from the Economist Intelligence Unit,
facility due to extreme weather as no more than $15 million over 2015, which also used VaR to estimate the value at risk from climate
the next two years at 95% confidence. This type of calculation change. 84 The study concludes that the expected value at risk is $US4.2
allows managers to measure the exposure for each of the critical trillion, though like the prior study it emphasizes the significant tail risk
dimensions of their business and get a well-quantified assessment that makes the high-end projections much worse than the mean. Aviva uses
of the potential losses at probability confidence intervals that are this methodology to evaluate climate risks in their insurance and
acceptable to them. 82 investment activities.
Supply chain - Consider different risk While managers often recognize the potential for supply chain Royal KPN, a Telecommunications firm in the Netherlands, recognizes
configuration profiles of various disruptions to impact their company, most managers have done that the risk due to floods that interrupt their communications network is
suppliers in purchase very little to reduce the likelihood of disruptions or mitigate their “huge” (as reported in their response to the CDP survey). To protect
decisions. effects. 85 Supply chain resilience emphasizes both reducing the risk themselves from these losses, the company has invested in a “geo-
- Evaluate risk of suppliers of disruption and building supply chains that can quickly recover redundant” network to ensure that any operating disruption will be
from all types of the from any disruptions that do occur. After assessing supply chain resolved within four hours or less, due to the ability to shift any critical
climate risks, including risks, many firms can create contingency plans, identifying activities to an alternative location. Further, the company installs all
physical, value chain, and alternative suppliers with whom they contract for back-up supplies critical equipment well above sea level. 88
stakeholder risk. in case of a disruption. 86 Segmenting supply chains by products or
- Construct supply chain to regions prevents disruption in one part of the supply chain from
optimize on efficiency rippling into disruption in the entire supply chain. 87
and resilience.

33
Insurance - Manage risk by securing One type of hedge. Investment up front provides payout under Insurance companies have been developing new insurance products to
financial payout in case specified future conditions. meet the needs of firms facing climate change related risks. Policies can
of loss. cover losses from weather-related disruptions and damage, input price
increases, or consumer backlash from negative PR. Munich RE offers
insurance against lower than expected amounts of sunshine, which
negatively affect solar electricity generation. 89
Real options - Manage risk by making Unlike derivatives or financial options that a company might invest Real options theory can be employed to address uncertainty and risk in the
small investments now in to hedge their risk, real options involve investments in “real” or supply chain by increasing flexibility. Alternatives described within the
that increase flexibility tangible assets. Real options provide value through the flexibility real options framework include deferring investments, staging series of
for subsequent decision that they offer to the firm—flexibility borne out of either investing smaller investments (where the later can be canceled), exploring with
making. in an asset that yields more alternatives for subsequent investments prototype projects, leasing instead of buying property, outsourcing, and
or the flexibility to delay deciding on whether to commit to a expanding commitments after learning of a favorable outcome. 91
specific investment. The real options framework is especially
powerful in situations of uncertainty, when the future state of the
world is not yet known. The value in each option is driven by the
revelation of information over time, so that delayed decisions are
more informed. 90
Integrative risk management tools
Enterprise - Unified framework for ERM provides an integrated assessment of all material risks facing The A2A Group, an electric utility firm in headquartered in Italy, uses an
risk assessing and a company. The first step in an ERM program is identifying the ERM system to evaluate climate risk and integrate risk management into
management incorporating all risks. risks to which the company is exposed that will be included in the strategic decision making. Re-gearing the use of this system, the company
- Tool for gathering system. This has expanded over time from financial and currency states, “The purpose is to make the business risk management an integral
(ERM)
information across the risk, to operational and strategic risks, 92 and can be extended to and systematic part of management.” Their ERM process directly involves
organization about risk climate change related risks. The firm then needs to implement a managers in risk identification, evaluations, and assessment, and keeps
exposure and valuation. consistent way to measure risk exposure. The firm then aggregates managers informed of the results. “The assessment is done every six
- Integrates risk valuation the risks, taking into account correlations across the risks. This months and its results are reported to the Internal Control Committee (part
with strategic decision system benefits the management of risks by presenting a single of the Supervisory Board) and to A2A General Managers.” This process
making. framework for assessment and management, potentially informing shapes the strategic decision making of the firm. “Review of climate
every aspect of strategic decision making. In addition, an ERM change risks and opportunities are an integrated part of A2A's strategy
program provides the potential to connect all operations and process, all new projects and investments, the annual business planning
managers into the same system, so that all operating managers process and the financial and extra-financial reporting process.” 93
throughout the firm have the ability to assess how the risks
associated with each new project impact the risk profile at the firm
level.
Scenario - Identify potential future Scenario planning is a general tool used under many different BG Group, and Oil & Gas company from the United Kingdom, describes
planning risks. circumstances in which there is significant uncertainty about key using different possible future scenarios for the price of carbon such that
- Evaluate future scenarios aspects of the future operating environment. Scenario planning “Our shadow carbon price enables us to test the resilience of investments
involving several begins with an informed brainstorming session to conjure up a to future climate change policies which could result in costs associated
dimensions of possible number of internally consistent possible future scenarios. “Scenario with GHG emissions as well as to a range of scenarios consistent with the
climate-related changes. planning seeks not to predict the future but to envisage alternative 2deg C goal.” 95 Swire Pacific, a Real Estate Management firm based in
- Assess value of projects views of the future in the form of distinct configurations of key Hong Kong, reported to the Carbon Disclosure Project that they have
or investments under environmental variables.” 94 For assessing climate change related engaged with Forum for the Future to run scenario planning exercises to
various potential future risk, it could involve developing a range of scenarios associated evaluate their climate risk exposure. The company incorporates the
conditions to assess risk with different climate related outcomes (e.g., differing frequencies learning from these workshops, especially regarding issues and events that
exposure and potential of violent storms, various levels of carbon taxes, alternatives for would significantly affect their business, in their organization risk planning
value changes. consumer preferences). Managers evaluate the value of their firm, process. 96
and the firm’s significant investments and activities, under each of
the possible future scenarios.

34
 Table 4

Climate change risk mitigation: firm responses vs. different types of risks

Risks from climate change

II – Value Chain Risks III – External Stakeholder Risks
I – Direct/
Firm Physical Risks Logistics/ Energy/ Product Market Political/ Stakeholder/ Human Resources/
Responses Supply Chain Factor Market Prices Regulatory Activist / Investor Talent
External • Climate change • Supply chain • Hedging against • Diversification • Corporate • Respond • Attract and
responses adaptation (e.g., redundancy price risks (e.g., for of product political strategically to retaining talent
relocation/ • Engage energy, raw portfolio, shift strategy stakeholder (firm
preparation of potential materials) to products • Respond pressure (e.g., reputation,
assets) substitute • Purchase low- with superior strategically game of private availability of
• Contingency suppliers carbon energy environmental to regulations politics) workers)
planning/ • Shift supply impact (e.g., • Pre-emptive
redundancy chains to less • Develop regulatory engagements with
vulnerable product compliance) stakeholders
suppliers/count solutions for • Participate in • Partnerships with
ries future collective stakeholder
action efforts groups
vis-à-vis
government
actors (e.g.
industry
associations)
Internal • Organizational • Climate • Increase internal • Reallocate • Regulatory • Rapid response • Employee
responses restructuring forecasting for energy and resource investment affairs/non- team for external climate
• Resilience vulnerability efficiency toward market challenges training
training programs assessment • Use of internal products with strategy • Develop internal programs
• Develop response • Contracts with carbon price more value in department capabilities for • Global talent
to disaster / suppliers • Innovation to reduce resource • Provide reporting and sourcing
physical impacts contain clauses energy & resource constrained leadership on management of
and training to to protect from use future internal climate related
implement harm • Increase self- • “Design to practices to issues.
sufficiency in sustainability” gain a “seat at • CEO leadership
energy (e.g., solar approach the table” on central climate
panels) issues

35
Endnotes

1
For more information about this historic meeting, see UNFCCC, “Leaders Day at COP21 UN Climate Change
Conference: Over 150 Leaders Back Drive for New Agreement in Paris,” UNFCCC, 2015,
http://newsroom.unfccc.int/unfccc-newsroom/leaders-day/.
2
For more information on the agreement, please see European Commission, “Paris Agreement - European
Commission,” 2016, http://ec.europa.eu/clima/policies/international/negotiations/paris/index_en.htm.While the
United States at the time of submission of this paper has indicated its intent to withdraw from the agreement due to a
new presidential administration, it cannot do so legally until November 2020.
3
IPCC, “Climate Change 2013: The Physical Science Basis” (IPCC, UN, 2013). details the scientific consensus
about the impacts and causes of climate change.
4
Tollefson, Jeff, “Climate change is hitting the planet faster than scientists originally thought,” Nature, February 28,
2022, https://www.nature.com/articles/d41586-022-00585-7.
5
These challenges are discussed in multiple publications, including COP 21, “Presentations given by World Leaders
at the UN Climate Conference in Paris.,” (2015) and National Research Council, America’s Climate Choices
(Washington, DC: The National Academies Press, 2011), https://www.nap.edu/catalog/12781/americas-climate-
choices.
6
The multitude of climate change impacts on firms are noted by Hauke Engel, Enkvist Per-Anders, and Kimberly
Henderson, “How Companies Can Adapt to Climate Change | McKinsey & Company,” July 2015,
http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/how-companies-
can-adapt-to-climate-change; Kimberly O. Packard and Forest Reinhardt, “What Every Executive Needs to Know
about Global Warming,” Harvard Business Review 78, no. 4 (2000): 128–35; Peter Romilly, “Business and Climate
Change Risk: A Regional Time Series Analysis,” Journal of International Business Studies 38, no. 3 (May 2007):
474–80, https://doi.org/10.1057/palgrave.jibs.8400266; Gernot Wagner and Martin L. Weitzman, Climate Shock:
The Economic Consequences of a Hotter Planet (Princeton University Press, 2016).
7
New York Times, “Quotation of the Day,” The New York Times, August 9, 2009,
http://query.nytimes.com/gst/fullpage.html.
8
Rowan Scarborough, “Pentagon Orders Commanders to Prioritize Climate Change in All Military Actions,” The
Washington Times, February 7, 2016, http://www.washingtontimes.com/news/2016/feb/7/pentagon-orders-
commanders-to-prioritize-climate-c/.
9
DoD News, “DoD Releases Report on Security Implications of Climate Change,” U.S. Department of Defense,
July 29, 2015, 1, http://www.defense.gov/News/Article/Article/612710/dod-releases-report-on-security-
implications-of-climate-change.
10
DoD News, 1.
11
These statistics are drawn from the report by Jeff McMahon, “93 Percent Of Public Companies Face Climate
Risk; Only 12 Percent Have Disclosed It,” Forbes, July 13, 2016,
http://www.forbes.com/sites/jeffmcmahon/2016/07/13/93-percent-of-public-companies-face-climate-risk-only-12-
percent-disclose-it/.
12
Jean Rogers, “Why Investors Can’t Avoid Climate Risk by Divesting,” Wall Street Journal, September 14, 2015,
https://blogs.wsj.com/experts/2015/09/14/why-investors-cant-avoid-climate-risk-by-divesting/.
13
This statistic is from a study from the Center for Energy and Climate Solutions that cited Engel, Per-Anders, and
Henderson, “How Companies Can Adapt to Climate Change | McKinsey & Company.”
14
The demand for knowledge about how to respond to climate change in particular is noted by Climate Group,
“Brian Cahill, Moody’s: Businesses Have ‘a Real Hunger for Knowledge’ on How to Assess Climate-Related
Risks,” The Climate Group, July 13, 2016, https://www.theclimategroup.org/news/brian-cahill-moody-s-businesses-
have-real-hunger-knowledge-how-assess-climate-related-risks. Climate Group, “Brian Cahill, Moody’s: Businesses
Have ‘a Real Hunger for Knowledge’ on How to Assess Climate-Related Risks.”
15
This lack of study in the management literature is described by Chukwumerije Okereke, Bettina Wittneben, and
Frances Bowen, “Climate Change: Challenging Business, Transforming Politics,” Business & Society, 2011,
0007650311427659.
16
Recent articles that do so include Shaz Ansari, Barbara Gray, and Frank Wijen, “Fiddling While the Ice Melts?
How Organizational Scholars Can Take a More Active Role in the Climate Change Debate,” Strategic Organization
9, no. 1 (2011): 70–76; Shahzad Ansari, Frank Wijen, and Barbara Gray, “Constructing a Climate Change Logic: An
Institutional Perspective on the “tragedy of the Commons,” Organization Science 24, no. 4 (August 2013): 1014–40,

36
https://doi.org/10.1287/orsc.1120.0799; Charles A. Backman, Alain Verbeke, and Robert A. Schulz, “The Drivers of
Corporate Climate Change Strategies and Public Policy: A New Resource-Based View Perspective,” Business &
Society 56, no. 4 (2015): 545–75; M. Delmas, J. Lim, and N. Nairn-Birch, “Corporate Environmental Performance
and Lobbying,” Academy of Management Discoveries 2, no. 2 (June 1, 2016): 175–97,
https://doi.org/10.5465/amd.2014.0065; J. Howard-Grenville et al., “Climate Change and Management,” Academy
of Management Journal 57, no. 3 (June 1, 2014): 615–23, https://doi.org/10.5465/amj.2014.4003; Ans Kolk and
Jonatan Pinkse, “Market Strategies for Climate Change,” European Management Journal 22, no. 3 (June 2004):
304–14, https://doi.org/10.1016/j.emj.2004.04.011; Ans Kolk and Jonathan Pinske, “Business Responses to Climate
Change Identifying Emergent Strategies,” California Management Review, 2005; Jonatan Pinkse and Ans Kolk,
“Multinational Enterprises and Climate Change: Exploring Institutional Failures and Embeddedness,” Journal of
International Business Studies 43, no. 3 (April 2012): 332–41, https://doi.org/10.1057/jibs.2011.56; Romilly,
“Business and Climate Change Risk”; E. Schussler, C.-C. Ruling, and B. B. F. Wittneben, “On Melting Summits:
The Limitations of Field-Configuring Events as Catalysts of Change in Transnational Climate Policy.,” Academy of
Management Journal 57, no. 1 (February 1, 2014): 140–71, https://doi.org/10.5465/amj.2011.0812; Daina Mazutis
and Anna Eckardt, “Sleepwalking into Catastrophe: Cognitive Biases and Corporate Climate Change Inertia,”
California Management Review 59, no. 3 (May 2017): 74–108, https://doi.org/10.1177/0008125617707974; N.
Haigh and A. Griffiths, “Surprise as a Catalyst for Including Climatic Change in the Strategic Environment,”
Business & Society 51, no. 1 (March 1, 2012): 89–120, https://doi.org/10.1177/0007650311427425; Nardia Haigh
and Andrew Griffiths, “The Natural Environment as a Primary Stakeholder: The Case of Climate Change,” Business
Strategy and the Environment 18, no. 6 (2009): 347–59.
17
Studies by Godfrey and his colleagues perhaps come closest to our approach, presenting investments in corporate
social responsibility as a means to develop goodwill and a favorable reputation, which then provides “insurance” to
mitigate risks from negative events that would otherwise create backlash from external stakeholders: P. C. Godfrey,
“The Relationship between Corporate Philanthropy and Shareholder Wealth: A Risk Management Perspective,”
Academy of Management Review 30, no. 4 (October 1, 2005): 777–98,
https://doi.org/10.5465/AMR.2005.18378878; Paul C. Godfrey, Craig B. Merrill, and Jared M. Hansen, “The
Relationship between Corporate Social Responsibility and Shareholder Value: An Empirical Test of the Risk
Management Hypothesis,” Strategic Management Journal 30, no. 4 (April 2009): 425–45,
https://doi.org/10.1002/smj.750. However, these studies focus only on the reputational benefits of investments in
CSR, while our framework is oriented more broadly to a multitude of investments that firms could make that reduce
a large range of risks from climate change in many, often inter-related, ways.
18
McKinsey & Co., “Confronting Climate Risk,” May 15, 2020,
https://www.mckinsey.com/capabilities/sustainability/our-insights/confronting-climate-risk.
19
Wagner and Weitzman, Climate Shock: The Economic Consequences of a Hotter Planet, 7.
20
Richard Gledhill, Dan Hamza-Goodacre, and Lit Ping Low, “Business-Not-as-Usual: Tackling the Impact of
Climate Change on Supply Chain Risk,” PwC, 2013,
http://www.pwc.com/gx/en/services/advisory/consulting/risk/resilience/publications/business-not-as-usual.html.
21
These risks, among others, are described in more detail in IPCC, “Climate Change 2007: Synthesis Report”
(IPCC, UN, 2007).
22
For a recounting of Coca-Cola’s experience with drought and the ability to withdraw water, see AFP, “Drought
Forces Coca-Cola to Halt Canned Drinks in Namibia, as Businesses Ordered to Cut Water Use by 30%,” MG Africa,
May 12, 2016, http://mgafrica.com/article/2016-05-12-drought-forces-coca-cola-to-halt-canned-drinks-in-namibia-
as-businesses-ordered-to-cut-water-use-by-30/.
23
This business stoppage by American Airlines was reported by Zach Wichter, “Too Hot to Fly? Climate Change
May Take a Toll on Air Travel,” The New York Times, June 20, 2017, sec. Business Day,
https://www.nytimes.com/2017/06/20/business/flying-climate-change.html.
24
Wagner and Weitzman, Climate Shock: The Economic Consequences of a Hotter Planet.
25
These are the three types of uncertainty described by Frances J. Milliken, “Three Types of Perceived Uncertainty
about the Environment: State, Effect, and Response Uncertainty.,” The Academy of Management Review 12, no. 1
(January 1987): 133, https://doi.org/10.2307/257999.
26
Gledhill, Hamza-Goodacre, and Low, “Business-Not-as-Usual.” note the compounding impact of uncertainty,
adding to the complexity of firms’ response to climate change.
27
For example, see the climate forecasts reported in the IPCC, “Climate Change 2013: The Physical Science Basis.”
28
Justin Worland, “How Climate Change Helped Cause Massive Floods in Louisiana,” Time, September 7, 2016,
http://time.com/4482109/climate-change-louisiana-flooding/. provides a description of this flood.

37
29
Impacts of the flood are taken from Cameron McWhirter and Ruth Simon, “In Flood-Ravaged Louisiana, Small
Businesses Struggle to Recover,” Wall Street Journal, 2016, sec. Page One, http://www.wsj.com/articles/in-flood-
ravaged-louisiana-small-businesses-struggle-to-recover-1474050071.
30
This point was made in the post-disaster reporting of the event by Cameron McWhirter and Ruth Simon, “In
Flood-Ravaged Louisiana, Small Businesses Struggle to Recover,” Wall Street Journal, 2016, sec. Page One,
http://www.wsj.com/articles/in-flood-ravaged-louisiana-small-businesses-struggle-to-recover-1474050071.
31
The discrepancy in the historic classification of the flood and the recent occurrence of flooding was reported by
Debbie Lord, “Louisiana Flooding: What Is a 500-Year Flood and Why Is It...,” 2016,
http://www.ajc.com/news/news/national/louisiana-flooding-what-500-year-flood-and-why-it-/nsG9k/.
32
These additional costs were reported by Erik Sherman, “6 Industries Hurt by the California Drought,” Fortune
(blog), 2015, http://fortune.com/2015/04/09/6-industries-hurt-the-most-by-the-california-drought/.
33
See S.C. Herring et al., eds., “The Contribution of Human-Induced Climate Change to the Drought of 2014 in the
Southern Levant Region,” Bulletin of the American Meteorological Society 96, no. 12 (2015): S66–S70. for more
discussion of the climate change impacts on these various weather events.
34
Blackrock Investment Institute, “Adapting Portfolios to Climate Change: Implications and Strategies for All
Investors,” 2016, 5.
35
BlackRock, “Climate-related risk and the energy transition,” 2023,
https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf.
36
For further discussion of these limitations of managerial decision making, see Kevin J. Laverty, “Economic
‘Short-Termism’: The Debate, the Unresolved Issues, and the Implications for Management Practice and Research,”
Academy of Management Review 21, no. 3 (1996): 825–860.
37
Securities and Exchange Commission, “The Enhancement and Standardization of Climate-Related Disclosures for
Investors,” March 21, 2022, https://www.sec.gov/rules/proposed/2022/33-11042.pdf.
38
Ibid.
39
For an excellent investigation of how a multitude of cognitive biases apply in the context of climate change, and
the resulting inaction by managers, see Mazutis and Eckardt, “Sleepwalking into Catastrophe: Cognitive Biases and
Corporate Climate Change Inertia,” California Management Review 59(3) (2017): 74-108.
40
Engel, Per-Anders, and Henderson, “How Companies Can Adapt to Climate Change | McKinsey & Company.”
discusses the lack of firm quantification and management of climate change risks.
41
The effect of a triggering mechanism to focus managers‘ attention on an issue is identified and established by
Kristel Buysse and Alain Verbeke, “Proactive Environmental Strategies: A Stakeholder Management Perspective,”
Strategic Management Journal 24, no. 5 (May 2003): 453–70, https://doi.org/10.1002/smj.299; Jane E. Dutton and
Robert B. Duncan, “The Creation of Momentum for Change through the Process of Strategic Issue Diagnosis,”
Strategic Management Journal 8, no. 3 (1987): 279–295.
42
Manmade surprises, such as growing pressure from external stakeholders (e.g., through activist proposals,
regulation, competitor actions, customer demands, and industry associations) can also drive managerial attention to
climate change as discussed by Erin M. Reid and Michael W. Toffel, “Responding to Public and Private Politics:
Corporate Disclosure of Climate Change Strategies,” Strategic Management Journal 30, no. 11 (November 2009):
1157–78, https://doi.org/10.1002/smj.796.
43
Choong En Han, “Malaysian Glove Makers Facing Production Halts on Water Cuts,” Bloomberg.Com, April 15,
2014, http://www.bloomberg.com/news/articles/2014-04-15/malaysian-glove-makers-face-production-disruption-
on-water-cuts. documents the effect of the drought in Malaysia on these companies, among others.
44
Coca Cola’s experience with water in India is described by Paul Brown, “Coca-Cola Plant Must Stop Draining
Water,” The Guardian, December 19, 2003, sec. World news,
http://www.theguardian.com/world/2003/dec/19/india.sciencenews.
45
This pattern is noted by Danny Miller and Peter H. Friesen, “Strategy‐making and Environment: The Third Link,”
Strategic Management Journal 4, no. 3 (1983): 221–35.
46
This is consistent with the findings reported by William Q. Judge and Thomas J. Douglas, “Performance
Implications of Incorporating Natural Environmental Issues into the Strategic Planning Process: An Empirical
Assessment,” Journal of Management Studies 35, no. 2 (1998): 241–62.
47
Agrawala, S. et al., “Private Sector Engagement in Adaptation to Climate Change: Approaches to Managing
Climate Risks,” OECD Environment Working Papers, No. 39, 2011, http://dx.doi.org/10.1787/5kg221jkf1g7-en.
48
Cook, Holly, “Preview snapshot: Anglo American,” Morning Star, February 19, 2009,
https://www.morningstar.co.uk/uk/news/63877/preview-snapshot-anglo-american.aspx.
49
Reuters, “Miners' profits face an unusual foe: extreme weather,” July 29, 2022,
https://www.reuters.com/markets/commodities/miners-profits-face-an-unusual-foe-extreme-weather-2022-07-29/.
38
50
Henderson, Kimberly and Jukka Maksimainen, “Here’s how the mining industry can respond to climate change,”
McKinsey & Company, August 27, 2020, https://www.mckinsey.com/capabilities/sustainability/our-
insights/sustainability-blog/here-is-how-the-mining-industry-can-respond-to-climate-change.
51
Villicaña-García, Esbeydi et al., “Planning of intensified production of solar grade silicon to yield solar panels
involving behavior of population,” Chemical Engineering and Processing - Process Intensification No. 161, April
2021, https://doi.org/10.1016/j.cep.2020.108241.
52
Carbon Disclosure Project, “How companies in Asia Pacific are preparing for the net-zero economyHow
companies in Asia Pacific are preparing for the net-zero economy,” 2022, https://cdn.cdp.net/cdp-
production/cms/reports/documents/000/006/179/original/How_companies_in_Asia_Pacific_are_preparing_for_the_
net-zero_economy_EN.pdf?1650445441.
53
Martinich, Jeremy and Allison Crimmins, “Climate damages and adaptation potential across diverse sectors of the
United States,” Nature Climate Change No. 9, 2019, https://doi.org/10.1038/s41558-019-0444-6.
54
CDP Disclosure Insight Action, “Major Risk or Rosy Opportunity: Are Companies Ready for Climate Change?”
2019, https://cdn.cdp.net/cdp-
production/cms/reports/documents/000/004/588/original/CDP_Climate_Change_report_2019.pdf?1562321876.
55
Kjellstrom, Tord, “Impact of Climate Conditions on Occupational Health and Related Economic Losses: A New
Feature of Global and Urban Health in the Context of Climate Change,” Asia Pacific Journal of Public Health 28,
Issue 2, January 26, 2015, https://doi.org/10.1177/1010539514568711.
56
Environmental Protection Agency, “Climate Change and the Health of Workers,” December 13, 2022,
https://www.epa.gov/climateimpacts/climate-change-and-health-workers.
57
Osborne, Margaret, “Drying Great Salt Lake Could Expose Millions to Toxic Arsenic-Laced Dust,” Smithsonian
Magazine, January 13, 2023, https://www.smithsonianmag.com/smart-news/drying-great-salt-lake-could-expose-
millions-to-toxic-arsenic-laced-dust-
180981439/#:~:text=As%20the%20lakebed%20becomes%20exposed,disease%2C%20lung%20disease%20and%20
cancers..
58
Ruggeri, Amanda, “How climate change will transform business and the workforce,” BBC, July 9, 2017,
https://www.bbc.com/future/article/20170705-how-climate-change-could-transform-the-work-force.
59
Agrawala et al., 2011.
60
Ibid.
61
Attinasi, Maria Grazia, et al., “Supply chain disruptions and the effects on the global economy,” European Central
Bank, August 2021, https://www.ecb.europa.eu/pub/economic-
bulletin/focus/2022/html/ecb.ebbox202108_01~e8ceebe51f.en.html.
62
Layne, Rachel, “Why Companies Raise Their Prices: Because They Can,” Harvard Business School, May 5,
2022, https://hbswk.hbs.edu/item/why-companies-raise-their-prices-because-they-can.
63
Ibid.
64
Boesler, Matthew, “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs,” Bloomberg, November
30, 2021, https://www.bloomberg.com/news/articles/2021-11-30/fattest-profits-since-1950-debunk-inflation-story-
spun-by-ceos?leadSource=uverify%20wall.
65
Huddleston, Tom, “4 out of 5 small business owners say they can weather a recession—but inflation is cutting
into profits: Survey,” CNBC, September 23, 2022, https://www.cnbc.com/2022/09/23/small-businesses-say-
inflation-is-cutting-into-profits-new-survey.html.
66
Details of the ERM system in general, including a discussion how such a system works to focus attention on
issues within an organization, is provided by Robert Simons, “The Role of Management Control Systems in
Creating Competitive Advantage: New Perspectives,” in Readings in Accounting for Management Control
(Springer, 1990), 622–45; Robert Simons, “Strategic Orientation and Top Management Attention to Control
Systems,” Strategic Management Journal 12, no. 1 (1991): 49–62.
67
Brian W. Nocco and René M. Stulz, “Enterprise Risk Management: Theory and Practice,” Journal of Applied
Corporate Finance 18, no. 4 (2006): 8–20. detail these changes at Nationwide.
68
The Delphi method “entails a group of experts who anonymously reply to questionnaires and subsequently receive
feedback in the form of a statistical representation of the "group response," after which the process repeats itself. The
goal is to reduce the range of responses and arrive at something closer to expert consensus.” 1776 Main Street Santa
Rand Corporation, “Delphi Method,” 2017, para. 1, https://www.rand.org/topics/delphi-method.html..
69
Tom Aabo, John R. S. Fraser, and Betty J. Simkins, “The Rise and Evolution of the Chief Risk Officer: Enterprise
Risk Management at Hydro One,” Journal of Applied Corporate Finance 17, no. 3 (June 2005): 62–75,
https://doi.org/10.1111/j.1745-6622.2005.00045.x. document the benefits of the ERM system at HydroOne.

39
70
See (Ambec Stefan and Lanoie Paul, “Does It Pay to Be Green? A Systematic Overview,” The Academy of
Management Perspectives 22, no. 4 (2008): 45–62., and Praveen Goyal, Zillur Rahman, and A. A. Kazmi,
“Corporate Sustainability Performance and Firm Performance Research: Literature Review and Future Research
Agenda,” Management Decision 51, no. 2 (2013): 361–79. for recent reviews of this literature.
71
See the empirical results presented by Andrew King and Michael Lenox, “Does It Really Pay to Be Green? An
Empirical Study of Firm Environmental and Financial Performance,” The Journal of Industrial Ecology 5, no. 1
(2001): 105–16.
72
Empirical study of this relationship is reported by Shameek Konar and Mark A. Cohen, “Does the Market Value
Environmental Performance?,” The Review of Economics and Statistics 83, no. 2 (2001): 281–89.
73
This conditional benefit is proposed by Stefan Schaltegger and Terje Synnestvedt, “The Link between ‘Green’ and
Economic Success: Environmental Management as the Crucial Trigger between Environmental and Economic
Performance,” Journal of Environmental Management 65, no. 4 (August 2002): 339–46,
https://doi.org/10.1006/jema.2002.0555.
74
For more information on this more nuanced measure of materiality-weighted investments and the empirical
findings, please see Mozaffar Khan, George Serafeim, and Aaron Yoon, “Corporate Sustainability: First Evidence
on Materiality,” The Accounting Review, 2015, http://www.aaajournals.org/doi/abs/10.2308/accr-51383.
75
This analysis is presented in Vincent Aebi, Gabriele Sabato, and Markus Schmid, “Risk Management, Corporate
Governance, and Bank Performance in the Financial Crisis,” Journal of Banking & Finance 36, no. 12 (December
2012): 3213–26, https://doi.org/10.1016/j.jbankfin.2011.10.020.
76
This is the conclusion of the study by Mark P. Sharfman and Chitru S. Fernando, “Environmental Risk
Management and the Cost of Capital,” Strategic Management Journal 29, no. 6 (June 2008): 569–92,
https://doi.org/10.1002/smj.678.
77
These benefits of stakeholder management are empirically documented by Beiting Cheng, Ioannis Ioannou, and
George Serafeim, “Corporate Social Responsibility and Access to Finance,” Strategic Management Journal 35, no.
1 (2014): 1–23; S. L. Berman et al., “Does Stakeholder Orientation Matter? The Relationship between Stakeholder
Management Models and Firm Financial Performance,” Academy of Management Journal 42, no. 5 (October 1,
1999): 488–506, https://doi.org/10.2307/256972; Amy J. Hillman and Gerald D. Keim, “Shareholder Value,
Stakeholder Management, and Social Issues: What’s the Bottom Line?,” Strategic Management Journal 22, no. 2
(2001): 125–39.
78
Evidence is provided by Robert E. Hoyt and Andre P. Liebenberg, “The Value of Enterprise Risk Management:
Evidence from the US Insurance Industry,” Journal of Risk and Insurance, 2011.
79
The meta-analysis aggregate findings from numerous empirical studies, across many different samples of firms, as
reported by Charles Smithson and Betty J. Simkins, “Does Risk Management Add Value? A Survey of the
Evidence,” Journal of Applied Corporate Finance 17, no. 3 (2005): 8–17, https://doi.org/10.1111/j.1745-
6622.2005.00042.x.
80
RE Munich, Correspondence with representative from RE Munich, 2016.
81
Philippe Jorion, Financial Risk Manager Handbook, vol. 406, 2009.
82
American Institute of CPAs, “CGMA TOOL Financial Risk Management: Market Risk Tools and Techniques,”
2015.
83
Simon Dietz et al., “‘Climate Value at Risk’ of Global Financial Assets,” Nature Climate Change 6, no. 7 (April
4, 2016): 676–79, https://doi.org/10.1038/nclimate2972.
84
Economist Intelligence Unit, “The Cost of Inaction: Recognising the Value at Risk from Climate Change,” 2015.
85
Sunil Chopra and ManMohan S. Sodhi, “Reducing the Risk of Supply Chain Disruptions,” MIT Sloan
Management Review 55, no. 3 (2014): 73.
86
George A. Zsidisin, Alex Panelli, and Rebecca Upton, “Purchasing Organization Involvement in Risk
Assessments, Contingency Plans, and Risk Management: An Exploratory Study,” Supply Chain Management: An
International Journal 5, no. 4 (October 2000): 187–98, https://doi.org/10.1108/13598540010347307.
87
Chopra and Sodhi, “Reducing the Risk of Supply Chain Disruptions.”
88
CDP, “Carbon Disclosure Project Survey,” 2015.
89
RE Munich, Correspondence with representative from RE Munich.
90
Martha Amram and Nalin Kulatilaka, “Real Options:: Managing Strategic Investment in an Uncertain World,”
OUP Catalogue, 1998; R. G. McGrath, “A Real Options Logic for Initiating Technology Positioning Investments.,”
Academy of Management Review 22, no. 4 (October 1, 1997): 974–96,
https://doi.org/10.5465/AMR.1997.9711022113.

40
91
Federica Cucchiella and Massimo Gastaldi, “Risk Management in Supply Chain: A Real Option Approach,” ed.
Panayiotis H. Ketikidis, Journal of Manufacturing Technology Management 17, no. 6 (August 2006): 700–720,
https://doi.org/10.1108/17410380610678756.
92
Brian W. Nocco and René M. Stulz, “Enterprise Risk Management: Theory and Practice,” Journal of Applied
Corporate Finance 18, no. 4 (2006): 8–20.
93
CDP, “Carbon Disclosure Project Survey” CC2.1b.
94
Robert M. Grant, “Strategic Planning in a Turbulent Environment: Evidence from the Oil Majors,” Strategic
Management Journal 24, no. 6 (June 2003): 493, https://doi.org/10.1002/smj.314.
95
CDP, “Carbon Disclosure Project Survey” CC2.1b.
96
CDP CC2.1b.

41
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