‘Climate resilience’, a new(ish) term in the climate change lexicon, has become increasingly prominent. Following the publication of The UK Climate Change Committee’s “A Well-Adapted UK” Report in May and a summer where the impact of climate change has been felt more acutely than ever before, climate resilience has become a hot topic.
But what is climate resilience, why is it becoming more prominent and how will it impact lenders, investors, borrowers and businesses.
What do we mean by “climate resilience”?
Not to be confused with terms such as ESG or net zero, climate resilience is about planning for, and adapting to, the short, medium and long-term implications of our changing climate and environment. It is not (directly at least) about tackling the causes of climate change. It’s also not an optional extra or a ‘nice-to-have’. The risks to businesses posed by the changing climate are real and they are impacting on our society and economy now. Failing to identify and mitigate those risks can have a damaging impact on businesses and the wider economy. As such, building climate resilience is becoming an essential part of everyday business planning.
At its simplest, growing climate resilience for a business involves assessing the risks posed by climate change and taking action to mitigate those risks. In practice, what climate resilience looks like can vary greatly.
Different areas of the UK face different climate challenges but also have varying levels of resilience already built into buildings and infrastructure. The impact on a business is often dependent on the sector in which it operates and, even within sectors, individual businesses have quite different risk profiles. Once climate and environmental risks for a specific business are identified, a strategy can then be devised to mitigate those risks. That may involve physical alterations to buildings but could also involve contingency planning, stockpiling, training and changes to internal practice and policies (which could be as simple as loosening dress code restrictions to allow for cooler clothing during summer).
Why is climate resilience becoming more prominent?
The impact of climate change in the UK has become more evident in recent years, with predictions for the future ever starker (for example, by 2050 maximum temperatures in parts of England are predicted to regularly surpass 40 degrees with over 90 % of UK homes at risk of overheating). Whereas discussion of global warming by two or three degrees can seem abstract, we are now seeing the impact of climate change in the UK and measuring it in hectares burned, homes flooded and lives lost. What may until recently have been seen as an “over there” problem or a “far down the line” issue is happening now in front of our eyes. It has become tangible and is becoming increasingly costly for individuals, businesses and communities. It is that cost that is driving climate resilience to the forefront of climate change discussions.
From a political perspective, we are also seeing a shift from a mitigation-first approach, focused on preventing future environmental harm through emissions reduction (see the much-maligned Net Zero), towards a resilience-first approach, focused on ensuring an organisation or asset can withstand disruption, whether directly from climate change, or indirectly through geopolitical shocks or supply chain failure. The push for Net Zero hasn’t disappeared, rather the communication of it has changed, as the term has become more politically contentious. That change in messaging has also brought a focus on climate resilience.
What does climate resilience mean for lenders, investors, borrowers and businesses?
To address what climate resilience may mean for lenders, investors, borrowers and businesses, it is useful to think about what a climate resilience strategy might look like. The table below provides two simple, contrasting fictional examples:
| Business: a 60 bed care home business on the West coast of Scotland | Business: a 60 bed care home business in London |
| Climate Risk: Growing number of storms of increasing severity | Climate Risk: Extreme heat (more and longer heatwaves of increasing severity) |
| Impact/ Business Risk: The care home building is designed with adverse weather in mind and properly insured for damage caused by extreme weather, however local roads and energy infrastructure are aging and susceptible to storm damage. Damage to energy infrastructure would cause power outages impacting on general running of the business (heating, hot water, lighting, catering, laundry) as well as the ability to meet specific medical care needs dependent on electricity. Damage to and blocking of local roads (through storm debris and flooding) may impact deliveries and the ability to access outside medical care. If these risks occur there will be a negative impact on resident care, resident safety and resident satisfaction – with negative ramifications for business reputation, for turnover and ultimately for business value. | Impact/ Business Risk: The care home building is 15 years old and designed for a substantially cooler climate, with only standard ventilation and some internal fans for cooling. During heatwaves resident areas and individual rooms are at substantial risk of overheating. Overheating creates additional health risks for residents meaning more hospitalisations and deaths. Overheating also impacts on staff productivity and focus, leading to poorer service for residents and higher likelihood of mistakes in care provision. If these risks occur there will be a negative impact on resident care, resident safety and resident satisfaction – with negative ramifications for business reputation, for turnover and ultimately for business value. |
| Potential Mitigation: Installation of energy contingencies including back-up generator, solar panels and wind turbine. Reserves of clean linen and stockpiling of food, medicine and water instituted. Increase medically trained staff and on-site medical capability (reducing need for external medical care). Emergency planning (including patient evacuation plans) put in place in conjunction with local hospitals and emergency services. | Potential Mitigation: Air-conditioning system installed (strategically placed or throughout home). Shutters installed on windows to reduce internal heat (and reduce reliance on air-con). Solar panels installed to offset energy costs of air-con. Additional staff employed and breaks increased to mitigate impact of heat on care quality. Additional staff training on heat related health issues provided to staff and specialist medical equipment provided to care for those afflicted. |
The above is over-simplified, but it outlines the basics of what climate resilience requires, namely (1) identifying the potential climate risks; (2) identifying the potential impact of those risks on the business; and (3) putting in place measures to mitigate those risks.
There is, of course, one aspect not noted in the above examples: how all of this will be paid for. For businesses an inevitable driving factor in investigating, identifying and mitigating climate risk will be cost. A business will need to assess what it can realistically afford to do and balance that against the cost of not acting.
Lenders and investors will, of course, be conscious of the cost factor. However, it is expected that lenders and investors will increasingly interrogate a business’s climate resilience planning before providing funding. What assessments has the business carried out? Has it engaged specialist advisors? Does it have formal climate resilience reports? Is it reviewing on an ongoing basis? Does it have specific climate resilience policies? And then, for each aspect, are the actions taken appropriate for the business in question – i.e. should it be doing more?
Once risks are identified, lenders and investors will need to look at what mitigation is being undertaken. Is the business taking appropriate steps to mitigate the identified risks? What further steps is it planning? Can it afford to take necessary steps? Is the funding being used to facilitate climate resilience measures?
Comment:
All of the questions noted are expected to become more commonplace when lenders and investors are considering providing funds, and reviewing climate resilience will increasingly form part of standard risk analysis. That shift reflects a broader move away from a mitigation-first mindset focused solely on emissions reduction, towards a resilience-first approach focused on an organisation's ability to withstand disruption, whatever its source. Climate resilience is not an optional extra, and nor is it free – but the cost of inaction is now measurable in lost revenue, damaged reputation and, ultimately, diminished business value.
For businesses, the message is straightforward: start the conversation now, not when a lender or investor asks for it. At its core, building resilience means identifying the climate risks relevant to a specific site and sector, understanding how those risks translate into operational and financial impact, and putting proportionate mitigation in place. Businesses that can evidence this process – through documented risk assessments, specialist advice, and a live, regularly reviewed resilience strategy – will be better placed to withstand physical and operational shocks and better placed to demonstrate that resilience to funders.
For lenders and investors, climate resilience due diligence is becoming a standard part of credit and investment risk assessment, not a bolt-on or a green loan specific criterion. Embedding climate resilience focused questions into origination and ongoing monitoring processes allows funders to price and manage climate-related risk more accurately, and to identify which borrowers and investee businesses are genuinely future-proofing their operations.
Climate resilience is, at heart, a risk issue, and one that both sides of the lending and investment relationship cannot afford to ignore. Businesses that treat it as core to their planning – rather than an afterthought – will be better positioned commercially and provide a more appealing investment and funding prospect. Lenders and investors that build resilience questions into their standard diligence will protect their own exposure and be able to better support the businesses they fund through an increasingly volatile climate.
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Senior Associate
