This study examines the potential role of adaptation in assets and operations in response to climate change, and the expected effect of adaptation activities on firm value. In particular, by defining adaptive capacity of assets and operations, we can value the adaptive capacity of an asset (such as a seawall or a desalination plant) whose capital could lie idle for decades. We define the risk-return tradeoff and valuation impacts of adaptive behavior and idle capacity of long-life assets and present a case study that analyzes the role of adaptive capacity, evaluates appropriate financing mechanisms, and defines the risk and return profiles attributable to adaptive capacity. While the focus is on tangible assets such as infrastructure, the techniques discussed here can be extended to other assets, processes, and operations in a similar manner without loss of effectiveness.

Author names: 
West, J.
Bianchi, R.

West, J., & Bianchi, R. (2013). Preserving Value through Adaptation to Climate Change. Journal of Applied Corporate Finance, 25(3), 76–85

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