Managing Physical Impacts of Climate Change:
An Attentional Perspective on Corporate Adaptation
Jonatan Pinkse1 and Federica Gasbarro2
Forthcoming in Business & Society
1Manchester Institute of Innovation Research, Alliance Manchester Business School, University of Manchester, UK
2Istituto di Management, ScuolaSuperioreSant'Anna, Pisa, Italy
Corresponding Author
Jonatan Pinkse, Manchester Institute of Innovation Research, Alliance Manchester Business School, University of Manchester, Booth Street West, Manchester M15 6PB, UK
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Abstract
Based on a study of the oil and gas industry, this article examines how physical impacts of climate change become events that firms notice and interpret in a way that leads to an active response to adapt to these impacts. Theoretically, the study draws on the attention-based view to highlight the potential biases that might occur as a consequence of firms’ preconceptions as well as organisational structure and context. In the empirical analysis, the article derives a model that explains the influence of the attentional process on how awareness and perceived vulnerability lead firms to either adopt routine or non-routine measures to adapt to climate change. The article also explores the relevant underlying factors of awareness and perceived vulnerability. The findings suggest that how firms channel attention to climate events hasa distinctive influence on the measures firms take to cope with physical impacts. The article concludes with implications for research, management practice, and policymakers.
Keywords
adaptation, attention-based view (ABV), climate change, oil and gas industry
While until now the scientific and political discourse on the need to adapt to climate change’s physical impacts has been taking a backseat, with the recent Paris Agreement on climate change of December 2015, adaptation has finally achieved equal footing with the need for mitigation. In the development of the global agreement on climate change, countries no longer just developed plans to reduce greenhouse gas (GHG) emissions, but also set out how they would adapt to physical impacts (Mogelgaard, McGray, & Amerasinghe, 2015; UNFCCC, 2015). Besides affecting countries, physical impacts can also pose major challenges to firms.Such impacts lead to changes in the business environment (Weinhofer & Busch, 2013), leaving firms vulnerable when they are not able to cope with these changes (Busch, 2011; O'Brien, Eriksen, Nygaard, & Schjolden, 2007). Particularly vulnerable are sectors that rely on specific temperatures and seasonal conditions, such as agriculture, forestry, and tourism; have industrial facilities located in climate-sensitive areas, such as coastal areas and floodplains (IPCC, 2007); or depend on large-scale infrastructures (IPCC, 2012), such as energy, automotive and transportation sectors (Winn, Kirchgeorg, Griffiths, Linnenluecke, & Günther, 2011). Vulnerability can be reduced if firms adapt to impacts by implementing anticipatory adjustments or by seeking to absorb and recover from extreme weather and climate events (Linnenluecke, Griffiths, & Winn, 2012).
A perspective considering firms as vulnerable to climate change, instead of responsible for climate change, is still fairly novel (Berkhout, 2012; Linnenluecke & Griffiths, 2010; Tashman, Winn, & Rivera, 2015). As existing research has shown, firms have mainly focused on their role with respect to mitigation in terms of reducing GHG emissions, responding to climate policy, and creating business opportunities related to both (Pinkse & Kolk, 2009). Corporate adaptation to climate change is less well understood, in part because firms have not addressed adaptation to the same extent as policymakers and scientists have (Linnenluecke & Griffiths, 2010; Pinkse & Kolk, 2012; Sussman & Freed, 2008; Tashman et al., 2015). Nonetheless, recent anecdotal evidence suggests that business’ efforts to respond to so-called “adaptation emergencies” that are the result of extreme weather events are increasing rapidly (Caring for Climate, 2015; Hall, Berkhout, & Douglas, 2015). Recently,also a new stream of literature has emerged that sheds light on corporate adaptation strategies through conceptual frameworks based in organisation theory (Linnenluecke & Griffiths, 2010; Linnenluecke, Griffiths, & Winn, 2012; Winn et al., 2011) and empirical work within specific industries (Beermann, 2011; Busch, 2011; Galbreath, 2011; Haigh & Griffiths, 2012; Hertin, Berkhout, Gann, & Barlow, 2003; Hoffmann, Sprengel, Ziegler, Kolb, & Abegg, 2009; Linnenluecke, Stathakis, & Griffiths, 2011; Scott & McBoyle, 2007; Tashman & Rivera, 2015; Weinhofer & Busch, 2013). These studies identified factors that influence corporate adaptation strategies, e.g., awareness of climate-related physical threats, degree of uncertainty, and risk management capabilities(Busch, 2011; Hertin et al., 2003; Hoffmann et al., 2009; Tashman & Rivera, 2015), and presented models of adaptation strategies (Berkhout, Hertin, & Gann, 2006; Linnenluecke et al., 2012).
As this literature suggests, corporate adaptation is a difficult process for firms totackle and for scholars to understand (Berkhout, 2012). Not much is known about why firms notice and act upon certain stimuli and ignore others. Part of the problem is that climate stimuli are ubiquitous: “[s]ometimes the stimuli for adaptations are expressed as climate or weather conditions (e.g., annual average precipitation or experienced hourly or daily precipitation), sometimes as the ecological effects or human impacts of the climatic conditions (e.g., drought, crop failure, or income loss), and increasingly as the risks and perceptions of risks associated with climatic stimuli or the opportunities created by changing conditions” (Smit, Burton, Klein, & Wandel, 2000, p. 229). Moreover, given the business-as-usual nature of many stimuli (e.g., weather conditions), firms will already have organisational processes to deal with (some of) them. What is not clear, therefore, is which stimuli firms notice given the multiplicity of potential impacts (Berkhout, 2012), and whether firms perceive physical climate impacts as a unique problem in need of a tailored solution, or as a business-as-usual problem for which existing practices suffice (Winn et al., 2011).
This article examines the adaptation process and how firms select between alternative stimuli and decide how much effort to spend on developing a response for those stimuli they choose to act on. Insight into this process is important, because climate stimuli are notorious for their impact to be underestimated (Hulme, 2009). Consequently, climate change has been referred to as a predictable surprise: ‘an event or set of events that catch an organisation offguard,despite leaders’ prior awareness of all of the information necessary toanticipate the events and their consequences’(Bazerman, 2006, p. 180). What motivates this article is the question whether a firm’s chance to fall victim to such a surprise can be inferred from how a firm deals with external stimuli for which the potential business impact is still highly uncertain. From a societal point of view, understanding how firms deal with climate-induced physical impacts is relevant as well. If firms fail to do adapt, they might no longer be able to provide products and services for society. Neglect of relevant stimuli on their part might thus imperil the functioning of the societies firms serve (Surminski, 2013; Winn & Pogutz, 2013).
As a theoretical foundation, we apply the attention-based viewof the firm (ABV) that sheds light on how firms select between stimuliand decide how to respond to the selected stimuli (Kahneman, 1973; Ocasio, 1997, 2011). Attention has been defined as the process of noticing, interpreting, and allocating effort to “stimuli requiring action and the available repertoire which define that action” (Hoffman & Ocasio, 2001, p. 415; Kahneman, 1973;Ocasio, 1997). ABV emphasizes the influence of the organisational structure and context in channelling attention to certain stimuli and not to others (Nigam & Ocasio, 2010; Ocasio, 2011; Rerup, 2009). Not only does the attentional process refer to the mechanism of noticing and interpreting stimuli to select those that require action, but also of allocating effort to the selected stimuli to be able to define available responses for subsequent action (Kahneman, 1973; Ocasio, 1997, 2011).
To empirically examine the influence of a firm’s attentional process on adaptation to climate-related physical changes, we focus on the global oil and gas industry. This industry is particularly sensitive to physical changes due to its reliance on natural resources such as water supply; the fact that operations are located in geographic areas exposed to extremes; a high dependence on large-scale infrastructures; and its long-lived and relatively immobile capital assets. Using information from the Carbon Disclosure Project, we first explore which factors determine whether oil and gas firms notice climate stimuli and build up a state of awareness of physical impacts. We then investigate how firms interpret their vulnerability to these stimuli, and subsequently develop a response repertoire of adaptation measures. Based on the analysis we develop a model on the role of attention in corporate adaptation to climate change. The model explains how the process of noticing and interpreting of climate stimuli changes under the influence of structural and contextual factors, which in turn leads to different levels of effort firms put in developing adaptation measures, that is, either relying on existing practices (routine response) or tailored to the stimuli (non-routine response).
Literature Review
Awareness and Vulnerability Regarding Climate Stimuli
Firms are seen as important actors in mobilizing society to adapt to physical impacts of climate change (Berkhout, 2012). What is not clear, though, is why firms would take on such a role.Up to now, firms have either been known as fairly negligent of adaptation to climate change (Linnenluecke & Griffiths, 2010; Pinkse & Kolk, 2012; Sussman & Freed, 2008), have been taken by surprise by extreme weather events (Haigh & Griffiths, 2012), or have not considered adaptation measures as a specific response to climate change (Galbreath, 2014). Besides, adaptation to climate-induced physical changescould be delicate for firms.Adaptation calls into question firms’ relation with the ecosystems they are embedded in and depend on for (natural) resources(Whiteman, Walker, & Perego, 2013). Adaptation is also highly complex, not only due to the novelty of the issue, but also due to the great number of factors related to weather and climate events and their underlying dimensions (e.g., time, magnitude, location, predictability, etc.) that need consideration (Winn et al., 2011). Moreover, the science of climate change has not been accepted unequivocally; the science is still heavily debated between those that seem convinced by scientific findings about climate change and those that remain sceptical (Hoffman, 2011). Even if firms seem overwhelmed by direct climate stimuli from weather-related disasters or indirect stimuli from stakeholder pressure, press coverage, and external suppliers’ difficulties due to climate change (Berkhout et al., 2006; Tashman et al., 2015; Winn et al., 2011), there is no guarantee that they will take note of and act upon these stimuli (Bansal, 2003; Hoffman & Ocasio, 2001).
The corporate adaptation literature has highlighted two factors – awareness and vulnerability – to explain why certain firms respond to climate stimuli, while others fail to do so (Tashman et al., 2015). The first factor is the awareness of climate stimuli (Arnell & Delaney, 2006; Berkhout et al., 2006; Bleda & Shackley, 2008; Hertin et al., 2003; Hoffmann et al., 2009). Arnell and Delaney maintain that “before an organisation embarks on adaptation it must be first aware of the potential threat of climate change, and second concerned about potential impacts on its business”(2006, p. 229).In a study on ski resorts, Hoffmann et al. (2009) found that awareness has a positive impact on corporate adaptation measures. Ski resorts pursue more diverse adaptation measures the more they are aware of physical climate impacts. These findings suggest that awareness affects the scope of adaptation measures. However, firms can only build up awareness when they have the organisational processes in place to notice a broad set of climate stimuli.
The second factor that influences adaptation measures is vulnerability (Hertin et al., 2003; Hoffmann et al., 2009). Vulnerability has been defined as the degree to which firms fail to cope with climate-related disruptions in the natural environment (O'Brien et al., 2007). In a study of Australian firms, Linnenluecke, Griffiths, and Mumby(2015) found for example that their perceived vulnerability was an important mediator between managers’ use of scientific information about climate change and their perceived need to take action to adapt to physical impacts. While there are different understandings of vulnerability, we follow what has been referred to as contextual vulnerability. Contextual vulnerabilityviews the relationship between nature and society as mutually determined, instead of a one-directional impact of the environment on society. As O’Brien and colleagues explain, “[contextual vulnerability] isconsidered to be influenced not only by changing biophysical conditions, but by dynamic social,economic, political, institutional and technological structures and processes; i.e. contextual conditions”(2007, p. 76). How firms assess their vulnerability not only depends on objective biophysical features of climate stimuli, such as the frequency of extreme weather events, but also on more subjective socio-economic features (Linnenluecke & Griffiths, 2010). That is, vulnerability depends on how firms perceive the relevant timeframe, urgency, and controllability of physical impacts (APA, 2009).
An Attentional Perspective on the Corporate Adaptation Process
While the literature has referred to awareness and vulnerability as key factors for adaptation, how firms achieve awareness and assess vulnerability to climate-induced physical changes is less well understood. In the following, we show how insights from the ABV shed light on this process. As explained in the introduction, ABV refers to the attentional process of noticing and interpreting to select which stimuli to take action on and to decide with how much effort to do so (Kahneman, 1973; Ocasio, 1997). What is key to Ocasio’s view on attention is that he not only refers to attention in terms of whether stimuli are being noticed, but also how stimuli are being interpreted, because “interpretation of stimuli greatlyinfluences how much attention is devoted to those stimuli” (Cho & Hambrick, 2006, p. 454). So stimuli could be noticed, but still not have any attention devoted to them, if they are not interpreted as having a potential impact. ABV argues that three basic principles determine how firms decide how much attention to devote to stimuli (Ocasio, 1997).
First, firms have a selective focus of attention. Due to resource and time constraints, firms will not be able to notice and interpret a wide set of stimuli on a sustained basis and for that reasonfail to see many stimuli as requiring action (Ocasio, 2011; Rerup, 2009). What compounds selective attention is a process of enactment (Hoffman & Ocasio, 2001); that is firms construct their own meaning of objective characteristics based on certain preconceptions, and in so doing rearrange or disregard many of these characteristics (Weick, 1988). Due to selective attention, rare events run the risk of being disregarded when firms do not have dedicated structures to notice and interpret such events (Lampel, Shamsie, & Shapira, 2009). In case of unexpected rare events, firms will remain ignorant, if they lack a repertoire of categories available to interpret a weak signal (Levinthal & Rerup, 2006).By extension, many firms might not consider physical climate impacts as relevant stimuli because the impacts are novel, rare and complex (Winn et al., 2011). A selective bias is partly alleviated by routinization. Stimuli that keep being relevant become part of an automated response (Ocasio, 1997). Due to the nature of climate stimuli, though, developing routines might be a challenge (Winn et al., 2011). In a study on water and construction firms, Berkhout et al. (2006) found that since the climate stimuli firms were facingwere highly ambiguous and experienced indirectly, firms had difficulties assessing which standard operating routines would be adequate.
Second, attention is situated (Ocasio, 1997). As Ocasio explains, “what decision-makers focus on, and what they do, depends on the particular context they are located in” (1997, p. 190). Situated attention implies that whether an event is noticed not only depends on the characteristics of individual decision-makers, but also on the specific situation or context decision-makers find themselves in. The same type of event might be noticed by some, but ignored by others, depending on the characteristics of the context. In the case of climate change, situated attention is captured by the proximity of physical climate impacts relative to a firm’s operations.Whether firms will experience and notice potentially disruptive climate stimuli largely depends on the specific location of their operations (Driscoll & Starik, 2004; Galbreath, 2011). For example, a weather event might be perceived as extreme, when a firm operates in stable climatic conditions, and as normal when a firm operates in highly unstable climatic conditions. So, while climate-related physical impacts might affect many economic sectors, potential adaptation measures are context-specific, in line with the location of a firm’s operations(Berkhout, 2012; Winn et al., 2011).
Third, attention depends on the formal and informal organisational structures firms use to allocate effort to stimuli (Barnett, 2008; Ocasio, 1997). That is, the existing organisational structure has a bearing on the issues that firms consider as requiring action. When firms lack the structures to allocate focus towards physical climate impacts, they will either fail to notice or incorrectly interpret which climate stimuli might be relevant for them to act upon (Galbreath, 2011).Fankhauser, Smith, and Tol(1999) argue, for instance, that adaptation measures depend on the availability and access to reliable and detailed information about climate change and theability to process such information. Busch’s (2011) findings on adaptation practices in Swiss andAustrian electric utilities corroborate this argument. Firms with structures to source and process climate-relevant information are found to be better able to absorb such information and use it to develop specific adaptation measures. As these studies show, dedicated organisational structures enable firms to notice relevant climate-related information and process this information to interpret its value for the firm. A firm’s awareness and vulnerability thus not only depend on organisational structures to collect information, but also on those to interpret the information collected.
The three principles of the ABV – selective, situated and structured attention – suggest that the rarity and proximity of physical climate impacts relative to a firm’s operations and the selective bias created by existing organisational structures are important for a firm’s awareness and vulnerability. It is not clear, though, how these factors work together as part of a firm’s attentional process in building up awareness and assessing vulnerability. In the empirical part,we will address first the influence of selective, situated and structural attention on the process of generating awareness and assessing vulnerability. In other words, which factors determine how firms notice and interpret climate stimuli to create awareness and assess their vulnerability? Also, scholars have argued that a firm’s awareness and vulnerability will together translate into specific adaptation measures (Linnenluecke et al., 2012). What remains unanswered is whether firms consider physical climate impacts as a unique phenomenon or as business-as-usual. As second issue, we will therefore address how the attentional process affects the repertoire of adaptation measures that firms consider. That is, how much effort do firms put in developing adaptation measures in terms of developing practices tailored to climate-related physical impacts or relying on existing practices?