Firm Investments: Climate Change Adaptation vs Mitigation

By Alison Ernst

In the face of climate change, there is often debate whether more emphasis should be placed on mitigation, through the reduction of greenhouse gas emissions, or adaptation, through adjusting to the effects of climate change. We at HBS should be concerned with how firms will invest. Though any practical solution will inevitably include elements of both, let’s assume that a firm needs to choose one to focus on. Mitigation is the wisest investment, not just from an environmental perspective, but an economical one.

An over-simplified environmentalist argument for mitigation over adaptation is that the latter involves ‘giving up,’ whereas the former addresses the root cause. While this argument has some merit, it is far from sufficient to convince firms to invest. Of importance here is the principle of going concern. If the firm envisions being in business 50 years or more in the future, it makes more sense to focus on long-term solutions as opposed to increasingly expensive ‘quick fixes.’ Mitigation is by definition a more sustainable solution. Whereas adaptation requirements and costs will continue to increase if emissions are not adequately checked, sufficient mitigation can make adaptation unnecessary. Though in the short term it might make sense to build a short sea wall, adaptation becomes far less economical when that one-mile sea wall becomes 10 miles, or 100 miles.

It follows a saying I’m familiar with from my engineering days: spending $10 in design will save $100 in construction. It isn’t just a saying, though; the Stern review asserts that mitigation will be much cheaper in the shorter term, with annual costs of stabilization at about 1% of GDP, compared to business-as-usual costs of adaptation of 5-20%.

Similarly, though U.S. progress towards serious climate change legislation has been slow to date, it is more a question of when, not if. According to a recent survey, 65% of Americans support “significant steps” being taken to combat climate change immediately, and policy will eventually reflect the will of the people. Investing in mitigation allows firms to pre-empt inevitable government legislation in the most cost-effective way. When that time comes, firms that have already invested will be much better positioned to achieve profitability than their less-prepared competitors. Though an obvious argument in favor of adaptation is that it does not require the massive scale of cooperation that mitigation does to be successful, government mandates towards mitigation would minimize this benefit.

Furthermore, when it comes to adaptation investments, corporations are likely to consider direct effects on their business, and are less likely to address the more indirect aspects of climate change on customers or suppliers. Though one key benefit of adaptation is that it allows firms to focus on and invest in measures which will affect them most strongly, the other side of this is that these investments are likely to be somewhat isolated and therefore may be uncoordinated and an inefficient use of capital.

Finally, though some may view the firm’s sole purpose to be value maximization, it is worth noting that the worst effects of climate change are likely to be felt by the world’s poor, in the low-lying areas of developing nations. While adaptation is more likely to focus on effects immediate to the company, firms who engage in mitigation have the unique ability to have a tremendous positive effect on those who have far less control.

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