The risk of corporate lock-in to future physical climate risks: the case of flood risk in England and Wales
There has been a big shift in corporate awareness of climate risks in recent years. While external pressure from investors and regulators to disclose and mitigate the exposure of businesses to climate risks is increasing, many projected impacts are still barely understood. This includes the risk of ‘lock-ins’ in the face of increasing physical risks from climate change – recently identified by the Third UK Climate Change Risk Assessment as an urgent challenge.
Using the example of flood risk in England and Wales, this study looks at both the evidence for and drivers of business lock-ins to the physical risks from climate change. The findings show that business decisions made today, such as site selection or operational choices, can lock businesses into future risk trajectories that may be difficult and costly to change.
The authors identify gaps between the degree to which businesses are aware of flood risk and their actual exposure, in sectors including manufacturing and finance. They attribute this lack of awareness to low business capacity to understand site-level risk exposure and poor internal alignment between those tasked with making decisions and those assessing risks.
The results demonstrate that there is a business case for avoiding lock-ins today.
Key points for decision-makers
- Many businesses, in particular small and medium sized enterprises (SMEs), lack the tools and information to assess and manage physical climate risks, while at the same time being disproportionately affected by them.
- So-called ‘lock-in’ effects are a particular concern. In the context of climate change, lock-ins refer to a type of ‘path dependency’ where business decisions made today determine climate risk levels now and in the future.
- Lock-ins can occur through choices about site location, infrastructure, supply chain networks or core business models, and due to low awareness of physical climate risks, poor quantification of the financial implications and inadequate corporate risk assessment.
- Failure to recognise the emergence of lock-ins may increase losses and prevent early detection and mitigation of systemic risks in global financial systems and supply chains. Corporate lock-ins can also entail broader costs to the economy and society.
- The UK’s third Climate Change Risk Assessment (CCRA 3) identifies lock-ins as a key challenge and mentions some areas where lock-ins are expected to negatively impact the resilience of companies in the UK, such as coastal areas in North Norfolk.
- However, there is still very little evidence showing these lock-ins empirically, nor have there been investigations of driving factors or implications; the paper addresses these gaps.
- The paper includes a case study analysis of current and future flood risk of recently completed business premises in England and Wales. Flooding is used as a case study because it is the most frequent prolonged and extreme-weather event experienced by businesses in the UK. Surface water flooding may pose a higher risk to business than fluvial or coastal flooding.
- The results from the flooding dataset indicate that businesses are underestimating physical climate risks. When risk assessment does occur, there is little evidence of risk-informed decision-making. This has significant consequences, including site-level damages, asset write-downs, stranded assets and development implications.
- Infrastructural lock-ins can be exacerbated by overreliance on ‘hard engineering’ solutions, such as flood protection. Increasing business awareness and trust in a wide-range of adaptation options, like nature-based solutions, is needed as a result.
- The authors’ survey of businesses found that businesses that collaborate with regulators, suppliers, banks, investors and insurers undertake a more diverse range of adaptation actions than their counterparts.