Well-adapted economy and finance system

Manage operational risks: identifying and managing climate-related risks helps businesses protect their commercial assets and employees. It requires considering future climate risks when making strategic and investment decisions, to avoid locking in low resilience options. Businesses have the most direct levers to act on risks to assets and employees.

Manage supply chain risks: although more challenging than managing operational risks, businesses can reduce climate risks to their supply chains. Considering climate conditions in procurement strategy is particularly important for businesses with geographically concentrated or climate exposed supply, such as food. Some supply chains have systemic impacts and may require UK Government support, covered in the macroeconomy subsystem.

]These adaptation actions are connected with adaptation in the food security system.

Capture opportunities: identifying and capturing opportunities to provide resilient goods and services can help businesses prosper as the UK adapts to current and future climate. Commercial adaptation opportunities could leverage the UK’s existing strengths in finance, consulting, engineering, and agri-tech.

Quantify physical climate risks and adaptation and incorporate in financial decisions: quantifying physical climate risks and the costs and benefits of adaptation means financial institutions can integrate them into risk management, decisions, and prices across financial markets. Accurately pricing current and future physical climate risks is important to avoid sudden shocks to financial markets. It also helps to deliver accurate price signals for businesses, households, investors, and other market participants. This action directly relates to the proposed target that physical climate impacts are incorporated into financial risk models for firms that are supervised by the Prudential Regulation Authority (PRA). Financial institutions not regulated by the PRA would also benefit from climate risk quantification.

Account for physical climate risk in capital holdings: financial institutions hold capital to help maintain financial stability during times of stress, so that they can provide credit and liquidity and absorb losses where necessary. Accounting for physical climate risks in capital holdings can help reduce financial impacts of climate events. Similarly, capital holdings should reflect the benefits of adaptation investments that reduce portfolio climate risks. Setting adequate capital holdings to reflect risk can be supported by longer-term climate scenario analysis.

Incorporate adaptation into insurance and pool residual risks: insurers and investors can work with the UK Government to develop innovative ways to cover residual climate risks and maintain the availability and affordability of insurance. These may include integrating adaptation into insurance products, public-private risk pooling, and novel insurance products, such as resilience bonds that bring capital into risk transfer markets. Effective adaptation across homes and businesses, alongside innovation in the insurance sector, is essential to ensure residual risks remain insurable. Delivering this action is needed to meet the proposed target to avoid increases in the UK insurance protection gap.

These adaptation actions are connected with adaptation in the built environment and communities system.

Climate-inclusive fiscal management: the UK Government, in partnership with national governments, is responsible for managing crises. This can include providing support after major climate events, such as repairing infrastructure or offering financial support for affected households and businesses. Climate-related spending could create significant risks to fiscal balances and public debt, even if the UK is well-adapted. A fiscal framework that considers the likelihood of additional future climate-related spending and how existing spend can support adaptation will help the UK Government manage crises while meeting its fiscal rules. It can reduce the risk of harmful cuts to spending elsewhere or unserviceable increases in sovereign borrowing costs. Delivering this action will help to meet the proposed target to maintain fiscal sustainability under changing climate conditions.

Respond effectively to climate inflationary pressures: monetary policy can affect inflation, economic activity, and the speed of recovery after chronic and acute climate damages. The rising frequency and severity of climate impacts can make trade-offs between inflation and output more difficult. But monetary policymakers have many tools to manage inflation, including interest rates, clear inflation targets, and credible signals of future policy. Coupled with an understanding of how climate conditions can affect monetary conditions, these tools can help to address climate-related inflationary pressures. Nonetheless, managing inflation relies on adaptation across the UK economy and appropriate policy. This is particularly true for sectors that affect inflation and welfare, such as food.

These adaptation actions are connected with adaptation in the food security system.

Manage macro-relevant supply chains: the UK Government has a role to help reduce domestic and international climate risks to supply chains that can affect inflation, productivity, or welfare. These include pharmaceuticals, energy, and food. Most supply chain risks can be managed by the private sector. However, some risks will not be fully managed for a variety of reasons, including the complexity of modern supply chains and dependence on international transportation. Actions include building strategic reserves, diversification, building redundancy, and engaging with key international partners and large businesses.

These adaptation actions are connected with adaptation in the health system, the energy system, the food security system, and in the transport system.