When climate risk rises, firms adapt and lobby instead of transform

If climate change is the greatest business risk of our time, why aren’t firms doing more to reduce it? Climate risk is no longer a distant threat, it’s a balance-sheet reality. Yet even as the financial costs mount, many companies are adapting to climate change or lobbying against regulation rather than helping to prevent it.

Despite unprecedented floods, wildfires, and extreme heat disrupting supply chains and operations across the world, corporate action has not kept pace. According to the World Meteorological Organization, weather, climate, and water-related disasters caused US$4.3 trillion in economic losses and more than two million deaths between 1970 and 2021, and their frequency and cost have risen sharply over recent decades. Climate policies aimed at reducing carbon emissions have also expanded: as of the latest World Bank data, 95 jurisdictions have implemented carbon pricing mechanisms, covering 28% of global greenhouse gas emissions. Meanwhile, thousands of firms have pledged to reach net zero, yet progress remains uneven.

The paradox is striking. As exposure to climate risk grows, many companies are not accelerating transformation, they’re doubling down on short-term protection. My research with Caroline Flammer (Columbia University) shows that firms tend to respond to physical risks such as storms and heatwaves by investing in adaptation, while those exposed to transition risks — new regulation, carbon pricing, or investor scrutiny — often turn to political lobbying pushing back on stricter regulation. These may be rational moves in the moment, but they are not long-term solutions.

In fact, these results are alarming and reveal a vicious cycle of corporate inaction. As a result, the physical consequences of climate change could even worsen in the future. If that pattern doesn’t change, today’s risk management and anti-climate lobbying behaviour could become tomorrow’s vulnerability.

The rationality trap

To understand why this happens, we need to look beyond climate science and into corporate behaviour. When physical risks increase, it makes sense for firms to strengthen their defences: diversify suppliers, relocate assets, and invest in resilience. When transition risks loom, it seems equally logical to manage exposure by engaging with policymakers or industry groups.

The problem isn’t that these actions are irrational. It’s that they are shortsighted. Adaptation helps firms withstand immediate shocks, but it doesn’t reduce the likelihood or severity of future ones. Lobbying can delay regulation, but often at the cost of slowing the very transition that companies will eventually have to navigate.

In practice, companies are tackling the effects of climate change, not its causes. Because the real costs won’t show up for years, short-term decisions can feel safe, even when they’re not.

Markets reinforce this bias: quarterly earnings calls and near-term performance metrics leave little room to account for long-horizon risks that are both uncertain and inevitable.

The time-horizon trap

This is sometimes described as the tragedy of time horizons. Climate risks unfold over decades, but corporate decision-making is measured in quarters. Budgets are annual, strategy cycles run three to five years, and incentive structures rarely extend beyond that.

Our analysis of more than 2,000 publicly listed U.S. firms confirms how this time mismatch shapes behaviour. Firms with shorter-term governance structures, for instance, where executive pay is heavily tied to stock performance, are significantly more likely to prioritise adaptation or political activity over emissions reduction.

By contrast, firms that operate with longer time horizons show a different pattern. They are more likely to invest in decarbonisation technologies, and lobby in support of stricter climate policies when facing higher climate risks. The difference isn’t ideology; it’s incentives. When leaders are rewarded for resilience over a decade, not a quarter, they act differently.

For boards, the implication is clear: short-termism isn’t just a financial challenge, it’s a climate risk multiplier.

From reaction to transformation

So how can business leaders escape the time-horizon trap? Based on our findings, three shifts in mindset can make a decisive difference.

1. From managing risks to shaping outcomes Adaptation protects value today; mitigation creates value tomorrow. Both are essential, but they serve different purposes. The firms that will lead in a changing climate are those that treat decarbonisation not as compliance, but as capability: integrating it into strategy, innovation, and investment decisions. Boards should ring-fence funding for emissions reduction, ensuring that short-term adaptation budgets don’t erode long-term transformation efforts.

2. From defensive lobbying to strategic influence Regulation is often seen as a threat, but it can also be an enabler. Companies that engage proactively with policymakers can help shape policy and provide clear, consistent frameworks that reward real progress. Instead of lobbying for exemptions or delays, firms can push for predictability: stable carbon pricing, transparent disclosure standards, and support for low-carbon technologies. Constructive advocacy doesn’t have to weaken competitiveness, it can strengthen it by creating the certainty that long-term investment requires.

3. From quarterly performance to generational resilience Climate risk is systemic and so must be the response. Boards can extend time horizons by aligning executive pay with multi-year sustainability outcomes, linking part of long-term incentive plans to verified emissions reductions. Investors, too, play a critical role by recognising that short-term returns built on unsustainable practices are a fragile form of value creation.

These shifts are not easy. They require rethinking how success is measured and rewarded. But they are also pragmatic. The firms that make these changes first will be the ones that adapt and thrive as the world around them transforms.

Leadership in the long view

It is tempting to assume that climate action will follow automatically from rising risk, that the market will correct itself as the costs of inaction grow. Our evidence suggests otherwise. Left to short-term incentives, firms will continue to adapt and lobby against regulation, not decarbonise.

The good news is that this behaviour can change. When governance structures and incentives encourage a longer-term view, firms make different choices. They see mitigation not as an externality, but as strategy.

In practice

Embed climate resilience in core strategy. Mandate that long-term climate scenarios inform capital allocation, risk management, and performance reviews — not just sustainability reports.

Protect transformation budgets. Separate adaptation spending from decarbonisation investment to ensure short-term defences don’t consume long-term funding.

Link incentives to measurable outcomes. Tie executive pay and promotion criteria to verified emissions reduction and resilience metrics, not just shareholder returns.

Engage to shape, not delay. Work with regulators and industry peers to create predictable, innovation-friendly climate frameworks that support long-term investment.

Ultimately, the greatest climate risk is strategic: waiting until the damage is impossible to ignore. But firms can change course. By widening their time horizons, they can turn resilience into a source of enduring advantage.

To explore the full analysis behind these findings, read the research paper

Climate Risk Exposure and Firms' Climate Strategies by Xia Li and Caroline Flammer, available on SSRN.