How Companies Respond to Climate Risks — and Why It Matters

Climate change increasingly poses systemic risks to the global economy. Firms face not only the physical consequences of climate change—such as extreme weather events, rising temperatures, and supply-chain disruptions—but also transition risks stemming from the shift toward a low-carbon economy, including regulatory changes, technological disruption, and evolving consumer preferences.

Despite companies’ exposure to both physical and transition climate risks and their need to simultaneously address these risks, the extant literature typically examines them in isolation. Similarly, most research narrowly focuses on one specific corporate reaction as opposed to adopting a holistic view of the full portfolio of strategies—which includes reducing emissions (mitigation), improving resilience to climate impacts (adaptation), or influencing regulatory environments (political strategies)—that companies may (or may not) pursue to address their climate risks exposure. Gaining better insights into the (lack of) preparedness of the corporate sector for heightened climate risks and the effectiveness of their mitigation strategies is critical to help inform policymakers about the ability of the private sector to address climate change and the potential need for more effective public policies.

Our study aims to address these research gaps by providing a holistic view and fine-grained analysis of firms’ climate strategies (including climate mitigation, climate adaptation, and political strategies) in relation to their firm-specific exposure to (physical and transition) climate risks.. The results are alarming: many corporations facing high climate exposures are not accelerating their climate change mitigation efforts. Instead, they are doubling down on short-term actions: adaptation in response to physical climate risks, and anti-climate lobbying in response to transition risks. These results reflect a “tragedy of time horizons” and the tension between managing short-term risks and committing to long-term sustainability.

Furthermore, these results point towards a potential vicious cycle of inaction: escalating physical impacts of climate change may not necessarily lead companies to reduce their GHG emissions. Instead, they may induce firms to prioritize adaptation strategies, redirecting resources away from climate mitigation. As a result, climate change will likely worsen in the future. In addition, increased transition risks are inducing firms to increase their anti-climate lobbying activities hoping to inhibit or delay stricter public governance. In sum, the results of this study underscore the urgency and need for effective public policy to provide proper incentives to the corporate sector to decrease environmental harm.

Tracking Corporate Responses to Climate Risks

The analysis is based on a comprehensive panel of U.S. publicly traded firms from 2002–2021, combining financial and climate-related datasets from multiple sources.

Physical climate risk exposure is measured using Trucost’s sensitivity-adjusted risk scores, which capture firms’ vulnerability to climate hazards such as flooding, water stress, and heatwaves. Transition climate risk is approximated as the product of a firm's total GHG emissions and the ratio of its emissions to the average emissions of its sector.

Manual coding of Carbon Disclosure Project disclosures identifies adaptation activities, capturing the breadth of corporate actions designed to increase resilience to climate risks. To examine political strategies, the study combines lobbying expenditure data from OpenSecrets with indicators of firms’ climate policy positions derived from state-level legislative bill tracking, InfluenceMap scores, and CEO political donation records. These data distinguish between pro-climate and anti-climate political engagement. This study uses two measures to evaluate corporate mitigation. The first captures changes in GHG emission intensity, and the second records whether firms adopt different types of climate targets. 

Firm Responses to Climate Risks

The results reveal a striking pattern: greater exposure to climate risks is not associated with more mitigation efforts. Instead, firms facing higher levels of physical or transition climate risks exhibit smaller reductions in GHG emission intensity and are less likely to adopt ambitious climate targets.

Physical climate risk primarily drives companies to boost adaptation strategies. Firms exposed to threats such as extreme weather expand investments in operational resilience. These investments include infrastructure upgrades, supply-chain diversification, and other measures designed to protect assets from climate shocks. However, higher physical climate risks are often associated with reduced emphasis on emissions reduction, suggesting adaptation may drive resources away from mitigation.

Transition climate risk is associated with different responses. Firms with greater exposure to regulatory or technological transition risks are more likely to engage in anti-climate political strategies. These firms increase lobbying against climate legislation and are more likely to join coalitions opposing stricter climate regulations. Although some of these firms disclose more general climate targets, they are less likely to commit to more demanding initiatives, such as science-based or net-zero targets that require substantial strategic changes.

The Limits of Market-Driven Climate Action

The findings challenge the widely held assumptions that increasing climate risks will automatically motivate firms to transform, and that the market will correct itself as the cost of inaction grow. Instead, our evidence suggests that when climate risks intensify, firms may prioritize strategies that address immediate operational or regulatory pressures rather than pursue longer-term mitigation strategies.

This behavior may generate a self-reinforcing cycle. As physical climate impacts intensify, firms may allocate more resources to adaptation, leaving fewer available for mitigation. At the same time, firms exposed to transition risks may attempt to delay regulatory change through political engagement. Together, these responses can slow progress toward decarbonization while increasing the likelihood of future climate disasters.

Overall, this study provides insights into the (lack of) preparedness of the corporate sector for heightened climate risks. While adaptation protects value today, mitigation creates value for tomorrow. The study therefore highlights the importance of effective public policy in shaping corporate climate behavior. Regulatory frameworks that provide clear and credible incentives for emissions reductions may be necessary to counterbalance firms’ short-term strategic responses to climate risks.

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Xia Li is Assistant Professor of Strategy and Entrepreneurship at London Business School.

Caroline Flammer is the A. Barton Hepburn Professor of Economics at Columbia University with appointments at the School of International and Public Affairs (SIPA), the Climate School, and the Columbia Business School (CBS). She is an ECGI Research Member. 

This blog is based on a paper presented at the 4th HKU Summer Finance Conference. Visit the event page to explore more conference-related blogs.

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