On a sunny November morning in 2018 near Pulga, Northern California, a piece of equipment in an electricity transmission tower owned by the utility Pacific Gas and Electric (PG&E) failed and ignited a fire. Fuelled by gusty winds and relentless drought, flames quickly escalated into the wildfire that turned out to be the most destructive in the state’s history.
The incident plunged the company into bankruptcy.
To the casual observer, a disaster of this kind might simply be down to bad luck. Yet as the subsequent legal and regulatory investigations showed, the incident serves as a warning to any company that fails to address the physical risks of the environment in which it operates.
In the case of PG&E, its failure was not one of ignorance but insufficient action: its adaptation measures did not match the scale and pace of the escalating climate threat.
Since it emerged from bankruptcy in 2020, PG&E has been investing in a range of climate adaptation measures, including advanced technologies such as sensors, drones and AI for fire prevention, asset inspection, better weather forecasts and faster fault detection and intervention as well as strengthening grid lines. These proactive steps have reduced wildfire risks connected to PG&E equipment by more than 90% in highest risk areas compared with the 2018-2020 average.https://www.pge.com/assets/pge/docs/outages-and-safety/outage-preparedness-and-support/wildfire-mitigation-plan-executive-summary.pdf
To researchers at the Stockholm Resilience Centre (SRC), PG&E’s travails illustrate how important it is for companies of all stripes to build resilience, especially as climate and nature-related risks increasingly matter to a company’s bottom line.
But risks from unexpected dislocations go beyond climate impacts: trade wars, supply chain disruptions or pandemic shocks reveal how a narrow corporate focus on productivity and efficiency gains might not be enough for long-term success.
The investment community should also take note. How companies address resilience and adaptation in a world facing environmental and political upheaval could reshape both portfolio risk management and capital allocation.
Source: Pictet Asset Management
Identifying adaptation and resilience risks
Research conducted by the SRC shows that businesses – or any organisations, sectors or cities that make up an economic and social system – which develop the capacity to constantly adapt and transform themselves are typically more successful. They tend to cope better with industry upheaval; in other words, being resilient offers greater chances of surviving and thriving.https://www.stockholmresilience.org/research/research-news/2015-02-19-what-is-resilience.html
Resilience matters in portfolio risk management.
That’s because traditional risk management tools like the use of environmental, social and governance (ESG) governance factors are not forward-looking and reward disclosure over action; they are ill-equipped to deal with future uncertainties. As the example of PG&E shows, ignoring resilience can destroy a company’s value.
Assessing resilience in an investment setting is a process that unfolds in different stages. Investors can evaluate the resilience of portfolio holdings by analysing risks and dependencies through a systematic approach (see grey box below for an example).
This exercise can reveal whether a company or sector can deal effectively with serious hazards and disruptions. Investors can then aggregate individual assessments to better understand risks at the portfolio level or use them as a roadmap for shareholder engagement activities.
Our resilience assessments of the water industry show how this approach can work in practice.
Water utilities’ resilience is a major issue for investors because they face existential risks from climate change. These include increases in the frequency and severity of flooding and droughts.
As a major investor in the industry, we needed to understand how each firm was investing in water infrastructure systems to adapt to changing weather patterns. British water utility Pennon Group was among the first investments to undergo our resilience assessment. The stock had been trading at a discount to peers due to worries over frequent combined sewer overflows (CSO). CSOs occur when sewer systems designed to carry both rainwater and sewage become overwhelmed during intense rainfall. They are a great environmental concern as untreated water seeps into rivers, lakes and coastal waters, harming water quality and damaging ecosystems.
As part of our resilience analysis, we have been engaging regularly Pennon on the matter while taking a system-wide approach by also discussing the issue with the UK water regulator. In this way, we can help strengthen the management of wastewater pollution and also align executive remuneration with material CSO reduction targets. We are already seeing a positive outcome as a result of our engagement, which we believe should lead to a rerating of the stock.
We’re looking to build on this approach and use the resilience framework in our active engagement to industries most at risk, such as energy, transport, agriculture and food supply.
Adaptation & resilience: burgeoning growth industry
But there is more to resilience-oriented investment than risk mitigation.
A whole new range of green investment opportunities is opening up.
As governments, businesses and consumers move to adapt to the rapidly changing environment, demand for adaptation and resilience (A&R) solutions can be expected to rise, boosting the investment appeal of companies (see Fig. 2)
Market cap and revenue growth of adaptation and resilience industry (USD billion)
Growing sub-sectors within adaptation and resilience industry
Source: LSEG, data as of 12.05.2025
Until now, adaptation hasn’t been a magnet for investment.
The sector attracted just USD30 billion in new capital last year, https://www.unep.org/interactives/adaptation-gap-report/2024/falling well short of hundreds of billions of dollars experts estimate are needed to mitigate the financial impact from climate change in the coming decades (see Fig. 3).
Total annual financial impact on S&P Global 1200 companies in the 2050s under the SSP2-4.5 scenario* (USD billion)
* Shared Socioeconomic Pathway (SSP)2-4.5 is a medium climate change scenario that contemplates strong mitigation, in which total greenhouse gas emissions stabilise at current levels until 2050 and then decline to 2100. This scenario is expected to result in global average temperatures rising by 2.7°C by the end of the century. No inflation assumptions are applied and results are presented in nominal 2024 prices.
Data as of 24.02.2025. Source: S&P Global
Encouragingly, this gap is beginning to close.
According to a report by London Stock Exchange Group, 34% of large and medium-sized listed companies in the FTSE All World Index are already referring to adaptation measures in their annual disclosures.Covering 4,000 companies https://www.lseg.com/content/dam/lseg/en_us/documents/sustainability/investing-in-green-economy-2025.pdf
Corporate adaptation finance flows are growing at a four-year CAGR of 21% with companies who have embraced adaptation solutions generating over USD1 trillion in green revenue last year.
Technology companies are among the leading industries investing in A&R strategies. That’s because extreme heat, drought and flood risks threaten their operations.
Those building and operating data centres in arid regions like Arizona will need to consider investing in efficient cooling technologies, smart water management and recycling systems and large solar panels and adopting sustainable and green building designs.
These measures should not only mitigate drought and heat risks and ensure round-the-clock operations during extreme weather, but also reduce emissions. By conserving energy and water, they will ease strain on local grids and water systems, on top of cutting utility bills.
Source: Tailwind, Taxonomy for Climate Adaptation and Resilience Activities, 2024
While corporations do not commonly disclose how much they spend on adaptation risk management, those which did showed they spent an average USD200 million each. Utilities and transport stand out with the largest capital expenses, with USD1 billion or more per company, on average.
A conservative estimate assumes that if each of the 10,000 publicly listed companies spends just USD50 million on climate resilience investments, the latent demand from corporations should be at least USD500 billion annually.
Tailwind, a strategic venture fund and market intelligence firm focused on resilience, highlights growing demand for A&R solutions in industries such as:
- Agriculture and infrastructure: satellite surveillance, high-resolution weather and seasonal forecast models, grid resilience and nature-based solutions
- Water: AI-powered flood risk assessment, water treatment plants, smart water metering systems, flood protection, stormwater management
- Health: rapid diagnostic tools, wearable cooling devices, air quality sensors
- Building: fire-resistant materials, thermal efficiency
Also boosting the A&R industry’s growth potential is the fact that it’s a hotbed of innovation. According to Tailwind, recent development include genetic modifications for climate resilient crop, climate-related early warning systems for health, including heat stress and smoke exposure, ground water salinity and saltwater intrusion impacts, stormwater modelling, climate-resilient crops, coastal resilient solutions, reforestation, soil health and data models for climate forecasting.
The economics of A&R
The economics of A&R should also ensure strong demand among enterprises.
A study by the World Resources Institute found that every USD1 invested in A&R generates more than USD10 in benefits to society over ten years. This translates to potential returns of over USD1.4 trillion.https://www.wri.org/news/release-wri-study-finds-climate-adaptation-investments-yield-massive-returns
Part of this will accrue directly to investors.
The non-financial gains are attractive too. The same report explained that A&R projects typically yield a “triple dividend”, providing an environmental and social return in addition to a financial one – an aspect that should appeal to impact investors.
Tighter regulation is also likely to accelerate corporate A&R spending. For example, Japan’s labour safety law now mandates companies to take steps to protect their employees against heatstroke. Required measures include giving employees wear easy to breathe or fan-equipped clothing and installing a ceiling to block sunlight and to provide cooling systems. Businesses face penalties of up to six months of imprisonment or a fine of up to half a million yen in the event of a breach.
In the UK, trade unions are calling for new legal maximum work temperatures, urging business to take steps to cool workplaces by installing air conditioning, ventilation and energy efficiency measures.https://www.tuc.org.uk/news/new-government-must-change-law-hot-workplaces-warns-tuc#:~:text=With%20temperatures%20set%20to%20hit,will%20help%20them%20keep%20cool.
Resilience in the era of great upheaval
Environmental and geopolitical upheavals are taking investors into uncharted territory. On the one hand, there will be new risks to manage. Investors will need to ensure the companies they own prioritise their own resilience. On the other, there will be new investment opportunities to explore.
Resilience helps investors navigate uncertainty by not avoiding disturbance but by actively engaging with it and investing in innovative solutions. This, in turn, promises attractive growth potential for companies developing adaptation and resilience technologies – a burgeoning industry that should become part of every investor’s portfolio.
Garry Peterson, Professor of Stockholm Resilience Centre and a leading academic on the study of resilience, proposes the following framework to evaluate resilience of a business (for more, please click here).
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Chart exposure to shocks
High-resolution spatial analysis that combines climate and ecological forecasts with asset-level data can reveal material risks to investment performance.
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Look for signals of instability
Systems often show early-warning signs before abrupt shifts. For businesses, greater output variability, slower recovery from shocks, and sustained increases in employee turnover can all signal eroding resilience. Investments that take longer to recover following each disruption may be nearing a tipping point.
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Analyse hidden dependencies
Hidden dependencies are often unpriced liabilities. Understanding them is as important as evaluating the asset itself.
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Assess organisational agility
Resilience depends on people and governance. Firms that learn, experiment, and adapt can reallocate resources and adjust strategy when conditions change.
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Track slow variables
System resilience is shaped by slow changes that are often ignored. Monitoring these slow variables provides foresight into looming thresholds before they trigger large losses.
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Assess nature stewardship
The long-term financial performance of an investment will increasingly depend on whether it is securing its natural capital base or eroding it.
