At the most recent meeting of the steering committee (SC) of the International Platform on Adaptation Metrics (IPAM), Adaptation Leader was elected to join the new-expanded IPAM SC, along with 9 other new members. Adaptation Leader’s founder & Managing Director will continue to represent the organization for all IPAM matters.
Joining the IPAM SC was a key goal for the not-for-profit Adaptation Leader in 2022 to cement our leadership role with IPAM and in adaptation metrics generally. One of Adaptation Leader’s core “sweet spots” is Metrics, Standards & Assurance. Our metrics work will be largely framed by our participation in IPAM activities.
Last year, for example, Adaptation Leader co-hosted a successful pre-COP 26 webinar with IPAM on the state of play in adaptation metrics and what might be addressed at and after the COP in this space. The recording of that event is available here.
Adaptation Leader’s Ira Feldman has been involved in IPAM activities as an individual member and Adaptation Leader formally became an organizational member of IPAM earlier this year. Ira continues to actively participate in the IPAM Techniques & Tools Committee. Recently, he agreed to co-chair that committee’s effort to develop a Compendium of adaptation metrics. Among IPAM’s other committees, Ira is also participating in its Cities Committee where he will contribute to an ongoing effort to synthesize the relevant scientific literature.
With the new year, Adaptation Leader is restructuring how it does business. This month the equity partners of Adaptation Leader LLC dissolved the existing corporation and steps have already been taken to transition to a not-for-profit entity. The new organization, Adaptation Leader Inc., is now a Maryland 501(c)3 entity and has achieved IRS tax exempt status. Ira Feldman continues as Adaptation Leader’s Founder & Managing Director. The newly-installed Adaptation Leader board of directors includes prior senior advisors Tom Baumann, Adam Saslow, Peter Soyka and Nina Gardner. Other independent members of the board will be named later this year.
As a not-for-profit, Adaptation Leader will continue its emphasis on several specific topics relevant to adaptation and resilience. Our internal teams will still include: ESG (Environment Social & Governance in the Financial Sector); NbS (Nature-based Solutions); CLR (Community-level Resilience); and a Metrics, Standards & Assurance team. These are our core “sweet spots.” Other areas of special interest will be Blended Finance, such as public-private partnerships (PPPs) and Foresight & Scenarios.
The Adaptation Leader secretariat will function as the hub for the organization’s activities. In additional to leadership and staff to be based in the secretariat, the newly-reorganized company will pursue its activities through a “hub & spoke” or network approach. Senior practitioners, policymakers and scholars will participate as “affiliated experts” through their own practices or institutions under working agreements with Adaptation Leader. In the near term, Adaptation Leader plans to add several additional senior experts to the mix who will focus on one or more of the team’s sweet spots. Each team will continue to develop innovative approaches to adaptation solutions and policy.
As a not-for-profit, Adaptation Leader is more ideally positioned to conduct its research and analysis; to serve as a thought leader, as an agenda setter, and as a convener of online and in-person activities; and to provide advisory services to all stakeholders. The Adaptation Leader website has been updated <www.adaptationleader.org> and all emails for team members have been changed to the .org suffix to reflect our not-for-profit status.
(Washington, DC/London, UK/Waterloo, ON/Boston, MA — August 24, 2021) —
Adaptation Leader LLC has developed a suite of six workshops spanning an array of climate adaptation issues. With extreme heat, wildfires, and flooding in the headlines – and the UN’s scientific body on climate change predicting more inevitable climatic disruptions, these workshops come at a critical juncture. “Businesses, governments, and communities are awakening to this climate threat, but without – as yet – a good understanding of even where to begin processing how they might adapt,” notes Adaptation Leader’s Karl Schultz.
The workshops offer organizations the fundamental background necessary to begin to address the challenge of climate adaptation and resilience. The workshops are now available to organizations on a private basis for their senior managers and internal teams and, beginning in September, they will be delivered online in public versions on an individual per seat basis. As Schultz explains, “We launched these comprehensive, detailed, engaging online workshops to rapidly escalate an organization’s orientation, so they can more confidently start taking steps to protect their assets and capitalize on new opportunities.”
The workshops are led by experts in the specific subject and draw upon the interdisciplinary expertise of the 20+ member Adaptation Leader team. Workshops include a four-part, four-hour “Adaptation 101” mini-course as an introduction to the field, and 2 ½ hour interactive workshops covering Adaptation Metrics, Foresight and Scenario Planning, Adaptation Strategy Valuation, Nature-based Solutions, and Resilient Public-Private Partnerships. “For each workshop, the package includes both pre-workshop materials and post-workshop activities convened on Adaptation Leader’s online collaboration platform,” explains Leila d’Heurle, Adaptation Leader’s workshops coordinator.
“For both the business and governmental communities, until now climate action has been largely limited to GHG reduction or mitigation,” suggests Ira Feldman, Adaptation Leader principal. “But the Paris Agreement called for equal attention to mitigation and adaptation. Most people are only now realizing that adaptation is going to be an important part of climate change strategies. These workshops are intended as a first step for those organizations recognizing that they need to up their adaptation game to adjust to the new normal.”
Adaptation Leader™ LLC provides services to leaders of organizations that want to plan and implement climate adaptation actions to protect and optimize their investments across their programs, products, and people. We are a team of 20+ experts located around the globe. We offer adaptation-focused strategic planning; research and analysis; educational and tactical workshops; organizational development and improvement services; and stakeholder convenings.
(Washington, D.C./London, U.K./Waterloo, ON/Boston, MA — July 22, 2021) Nina Luzzatto Gardner has joined the management team of Adaptation Leader™ LLC, a consultancy that provides services to leaders of organizations and companies that want to plan and implement climate adaptation actions to protect and optimize their investments. She is the director of Strategy International, a corporate sustainability and environmental, social, and governance (ESG) risk advisory firm she founded in 2000. With Adaptation Leader, Gardner will infuse a special awareness of human rights impacts on communities as they implement climate adaptation plans. Similarly, her deep expertise in corporate sustainability and ESG issues will help organizations incorporate adaptation and resilience into their strategic plans and translate these challenges for board-level consumption.
A lawyer by training, Gardner has been teaching Corporate Sustainability, Business & Human Rights as an adjunct professor at Johns Hopkins SAIS in Washington DC since 2013. She graduated in government from Harvard/Radcliffe, studied economics at the University of the Andes, in Bogota, and obtained her law degree from Columbia Law School. Gardner is a Board member of Farm from a Box, an Ag Tech start up, and is a member of the scientific committee of ASviS – the Alleanza Italiana per lo Sviluppo Sostenibile (the Italian Alliance for Sustainable Development).
Gardner joins Principals Ira Feldman, Karl Schultz, Peter Soyka, and Lisa Granquist, and the Adaptation Leader team of 20+ experts in working with companies to improve their commitment to sustainability and the Sustainable Development Goals, and with investors to better understand ESG risks in their portfolios. Read more about our team.
About Adaptation Leader
Adaptation Leader™ LLC provides services to leaders of organizations that want to plan and implement climate adaptation actions to protect and optimize their investments across their programs, products, and people. We are a global team of 20+ experts located around the globe. We offer adaptation-focused strategic planning; research and analysis; educational and tactical workshops; organizational development and improvement services; and stakeholder convenings.
Roland Mader, Strategic Advisor; Linus Adler, Associate; Leila d’Heurle, Associate; and Karl Schultz, Principal
Adaptation Leader LLC
This commentary is part of a series on emerging issues from Adaptation Leader LLC
The capital markets must acknowledge that there is no such thing as “not deciding” relative to climate risk – deciding to ignore climate risk is effectively a decision to select for the status quo (i.e., business as usual), whereas incorporating climate risk into financial valuation is adaptive management that will limit future beta/risk (Economist 2015).
Introduction
The Intact Centre on Climate Adaptation at the University of Waterloo, Canada, is pioneering the application of corporate valuation methods in conjunction with climate risk matrices on climate change risks. Their report published in March 2020 showcased five valuation methods: Ratio Analysis, Discounted Cash Flow, Rules of Thumb Valuation, Economic Value Added (EVA) and Option Pricing Models (OPM). All these methods are valid and well defined, but when factoring climate change risk into financial valuation, we believe that another approach, Strategy Valuation, is missing from this list.
Strategy Valuation explicitly takes into account the specific, individual risks which the valued company faces. The Strategy Valuation method is, in our opinion, best suited to take climate change risks into account. As applied to adaptation and resilience challenges in our practice, we refer to this as Adaptation Strategy Valuation or “ASV.”
Strategy Valuation in the Context of Corporate Valuation Methods
The most common corporate valuation method is the Discounted Cash Flow (DCF) method, as outlined in the referenced UOW paper. The DCF method is based on the Capital Asset Pricing Model (CAPM), where the projected after-tax cash flows are discounted with the CAPM discount rate. This can be the weighted average cost of capital to calculate the gross value of the company or the equity rate to calculate the net value. As outlined in the referenced UOW article, the CAPM discount rate is the sum of the risk-free rate and the market risk premium multiplied with the so-called beta factor, which is a dimensionless number, representing the unsystematic risk of the valued company, the risks that the company cannot diversify away. Climate change risks are unsystematic in nature and hence should be reflected in the beta factor. UOW translates the occurrence of extreme weather on cash flows into an upward adjustment of the beta factor of 7.5%. As the beta factor is based on historical company and market returns, climate risks, such as extreme weather adjustments should therefore, theoretically, already be reflected in the market returns. We argue, just like UOW, that this is unlikely to be the case. Furthermore, the CAPM model itself has always been criticised; the model assumes a perfect market, full transparency, no transaction costs, information immediately available to all market participants – which clearly is far from reality.
The fact is that market-based approaches and risk measures make it very difficult to quantify the specific climate related risks a company faces. While climate risks are by nature unsystematic, the impact of these risks are very different from company to company, for some the impacts are negative, for some they are positive.
The Strategy Valuation method is, in our opinion, best suited to take climate change risks into account. Strategy Valuation is in effect a DCF method as forecast of the after-tax cash flows is needed. The discount rate however, unlike the CAPM rate, is determined via risk aggregation using Monte Carlo Simulation, yielding the expected cash flows and their standard deviations, which in turn are used to calculate the discount rate in each particular year. It should be noted that the more uncertain the cash flows are, the higher is the standard deviation, hence the higher the discount rate and the lower the company value. Also, the Strategy Valuation method allows for different discount rates in different years which makes it even more suitable for valuing the impacts of climate change risks as these risks are not static. Strategy valuation can be applied to all strategic and/or entrepreneurial decisions. Typical applications include large investments, acquisitions or material changes in the strategy.
From Strategy Valuation to Adaptation Strategy Valuation
In essence, Strategy Valuation is a comparison of risk-return profiles of alternative (strategic) options for action, recorded by a risk-adequate future decision value, unlike the “traditional” capital market-oriented company valuation where historical and current stock market data and/or peer group comparisons are used. Hence, Strategy Valuation requires a process of structured identification, quantification and aggregation of risks.
Adaptation Leader LLC has created a strategy valuation cycle, called Adaptation Strategy Valuation. It values the exposure of a company to climate change risks and the value of adaptation.
As with every method used to value the impact of climate change risks, the translation of climate change risks into tangible uncertainties in the company statements is key. Caution must be applied when modelling the uncertainties, especially their correlations with each other in order to not amplify risks, resulting in unrealistically high results.
We believe that, for practitioners, it is preferable to assess climate change uncertainties on a company’s bottom line individually, instead of relying on the market to price in climate change risk. Also, the Strategy Valuation method can be applied to all sectors, even for cyclical industries as the risks are aggregated on an individual basis.
Option Pricing Models, as also referenced in the UOW article will play an important role in valuing climate change risk impacts for longer time frames (2050-2100) while Strategy Valuation is, in our view, better suited for shorter time frames within the financial planning horizon of most corporates (2021-2050).
The Road Ahead
Corporate valuation methods have been well defined and applied. When valuing climate change risks however, much work has still to be done. We certainly need further attention to translating climate change into climate impacts and further into corporate valuations than mere risk analysis. More and more investors demand climate change readiness from their investments, as currently partly addressed in the emerging ESG ratings. But the key question is and remains, how to translate climate models into uncertainties on a corporate level. At Adaptation Leader, the ASV approach translates climate models by means of quantitative and qualitative analysis and expert judgement.
Conclusion
Valuation is a powerful tool for investment decision-making, allocation decisions, and for climate change vulnerability and adaptation planning. We applaud the work of the Intact Centre on Climate Adaptation, to translate traditional corporate valuation methods for climate change risks.
Extending this work, Adaptation Leader proposes that the Strategy Valuation method is especially relevant for business and public sector valuation where climate impacts are already happening or are expected in the short to medium term. This method considers how climate and adaptations impact revenues and profitability/solvency and pinpoints and justifies optimal investments — for finance, operations, supply chain, human resources and markets.
Climate change is happening. We need to develop and deploy the best available tools to both mitigate and adapt to the new reality.
