From Climate Risk to Adaptation: Why El Niño is a Business Stress Test

From Long-Term Climate Scenarios to Near-Term Stress Tests

The physical impacts from climate change are increasingly becoming material to business, financial, and economic performance. Recent months alone have brought record-breaking, deadly heatwaves and wildfires across Europe; Canadian wildfire smoke and hazardous air pollution across large parts of North America; and severe flooding in Vietnam, southern China, and South Korea. The health-related risks to workers, transport disruptions, and destroyed croplands send clear signals that companies and supply chains need to prepare for more frequent and severe climate impacts.

For businesses, climate hazards can compound and cascade across value chains. Drought may reduce crop yields while lowering hydropower generation. Extreme heat can raise electricity demand while lowering worker productivity. Flooding can damage infrastructure and disrupt ports, roads, and logistics, while wildfire smoke and disease outbreaks can affect workforce health and operations. These interconnected impacts can result in delayed shipments, higher input costs, energy disruptions, and pressure on already vulnerable suppliers.
 

As the impacts and costs of climate change continue to rise, adaptation can no longer be treated as a future planning exercise. Businesses need to act now to protect operations, maintain supply chain continuity, and remain competitive, while embedding adaptation into both near- and long-term decision-making.

The economic case for adaptation is also becoming clearer. WRI analysis finds that every $1 invested in adaptation and resilience can generate more than $10 in benefits over ten years, while JP Morgan estimates that every $1 invested in adaptation can generate returns of up to $43.

Yet corporate climate adaptation has not kept pace with rising physical risk or the strengthening investment case. Many companies have identified climate-related risks through scenario analysis and disclosure processes, but relatively few have translated these findings into comprehensive adaptation plans and implementation. As a result, businesses remain exposed to disruptions across operations, supply chains, logistics networks, and the ecosystems and communities on which their businesses depend.

The emergence of the 2026–27 El Niño cycle brings these challenges into sharper focus. In June 2026, the World Meteorological Organization and U.S. National Oceanic and Atmospheric Administration announced El Niño has formed with a high chance it will become very strong between November and January—potentially the largest on record.

Although it is a naturally occurring climate pattern, El Niño is now unfolding in a warmer and increasingly climate-stressed world. Over the next 12 to 18 months, it is expected to amplify many of the physical climate hazards businesses already face, including extreme heat, flooding, wildfire conditions, water shortages, disease outbreaks, and disruptions to hydropower and transportation. 

The 2026–27 El Niño serves as a near-term stress test of corporate resilience. It is an immediate opportunity for companies to move from theory to practical action on adaptation that strengthens business continuity and supports the people and ecosystems on which they depend.

How El Niño and Climate Change Affect Business

While every El Niño is different, it is typically associated with wetter conditions in parts of southern South America, the southern United States, the Horn of Africa, and Central Asia, and drier conditions across Central America, northern South America, the Caribbean, Australia, Indonesia, and parts of southern Asia. 

Past El Niño events demonstrate how climate variability can translate into significant business disruption. Strong events have simultaneously affected agricultural production, commodity prices, hydropower generation, disease, wildfire activity, and transportation. The 1982–83 and 1997–98 El Niño events reduced global economic output by US$4.1 trillion and US$5.7 trillion, respectively, over the following five years. The 2015–16 event triggered severe drought, fires, and haze across Southeast Asia, a record Pacific hurricane season, a 1-in-500-year Caribbean drought, and disease outbreaks across the globe. 

For companies, the question is not whether all of these weather events occur, but whether their operations, suppliers, workers, and surrounding communities are prepared for a period of heightened climate volatility.

Vulnerable Conditions Exacerbate Climate Risk

The financial severity of climate impacts depends not only on the hazard itself, but also on vulnerability—the ability of people, ecosystems, and infrastructure to withstand and recover from climate shocks. Degraded ecosystems, fragile infrastructure, worker displacement, and limited access to healthcare can all increase vulnerability, thereby amplifying losses and slowing recovery. Vulnerabilities are often overlooked in standard climate risk analyses despite having the potential to cause some of the most significant climate-related damages. When these vulnerabilities are omitted, companies face blind spots in their operational, financial, supplier, and reputational risk management. 

Climate and El Niño Risks Vary by Sector and Geography 

Climate change and El Niño affect sectors and geographies unevenly. The below table highlights areas of concentrated near-term exposure from El Niño and how unaddressed societal and ecosystem vulnerabilities can translate into business risk.

Note: As El Niño conditions develop in the tropical Pacific, its impacts in Europe are more indirect and expected to peak in the autumn and winter periods. Other regions are expected to be affected more directly and severely, demonstrating the importance of understanding value chain exposure and transboundary risk.

Corporate Climate Adaptation: From Long-Term Planning to Near-Term Action

Climate adaptation is often treated as a long-term planning issue because many physical climate risks are framed around scenarios for 2030, 2040, or 2050. The 2026–27 El Niño changes that perspective by creating a near-term opportunity to test whether existing climate risk assessments, supplier programs, business continuity plans, and worker protections are sufficient under increasingly volatile conditions.

Investing in climate adaptation can protect enterprise value by avoiding operational losses, reducing downtime and recovery costs, improving supply chain reliability, protecting worker health and productivity, and strengthening the resilience of critical assets and natural resources. Adaptation can also help stabilize input costs, support insurability and access to finance, protect revenue and market share, and strengthen relationships with suppliers, customers, investors, and communities. These investments can generate broader social and environmental benefits by strengthening livelihoods, water security, ecosystems, and community resilience. The scale and timing of returns will vary by geography, climate exposure, business model, and the design and implementation of individual adaptation measures.

What Companies Are Experiencing Today

BSR engaged nearly 100 stakeholders in the first half of 2026, including several companies in consumer goods, food and beverage, technology, utilities, and finance, to pinpoint how to accelerate corporate action on climate adaptation. Business practitioners find: 

• The urgency to act is growing. Workers, suppliers, critical infrastructure, and communities across sourcing and manufacturing regions are already affected. Climate risk assessments need to extend across the value chain, and companies need to move quickly from assessment to implementation to protect assets, suppliers, people, and ecosystems vital for business continuity.
• To unlock investment, adaptation needs to be integrated into business and financial plans. This may be framed as business continuity planning, risk mitigation, or growth opportunities. While climate risks may be undervalued in the marketplace, companies that act now will be prepared to manage shocks. Relying solely on insurance as a risk carrier is insufficient, as insurers are raising premiums or canceling coverage in high-risk areas. 
• Adaptation needs to be practical, location-specific, and flexible in execution. Adopting adaptation pathways and establishing risk thresholds can support companies in managing uncertainty. This can help guide companies in the more challenging process of moving from risk identification to adaptation planning and implementation of solutions. 
• Adaptation needs to address people and nature, not solely physical assets. Worker health, safety, and well-being, together with business dependency and impacts on ecosystem services, can materially affect productivity, continuity, and recovery. People and nature should not be underestimated in risk analyses, nor as identifiers and enablers of risk mitigation solutions. 
• Investor expectations and disclosure requirements on physical climate risk and adaptation actions are increasing. IFRS, for example, requires disclosure of anticipated adaptation efforts and the resilience of the entity’s strategy and business model to climate-related changes and uncertainties. 
• Demand for collaborative solutions is high. Many climate risks transcend the capacity of any single company to address alone, particularly in shared supply chains, industrial zones, and critical ecosystems. Stakeholders emphasized the need for pre-competitive, cross-value-chain action to share costs, align incentives, and scale solutions. 

What Can Business Do Next?

Topics

• Climate and Nature

1. Stress-test critical value chains and identify key vulnerabilities. Map exposure across supplier regions, commodities, transport routes, and critical operations. Then identify where physical climate hazards intersect with vulnerabilities—underlying societal inequities, fragile ecosystems, and faulty infrastructure that prohibits climate readiness. Use these hotspots to prioritize adaptation investment based on potential business impact. Assess the company's adaptive capacity to determine whether existing governance, programs, and policies are sufficient to manage increasing climate volatility, or whether additional investment is required.
2. Align efforts across the business. Climate risks cut across operations, procurement, finance, risk, and human resources, but these functions often manage them through different processes and budgets. Adaptation also may be framed as business continuity planning, risk management, employee well-being, supply chain resilience, or growth opportunities. Aligning terminology, ownership, and existing initiatives, and identifying gaps enables a more coordinated enterprise-wide approach, helping companies maximize resources, avoid duplication, and make more effective investment decisions.
3. Engage suppliers before disruption occurs. Work with suppliers to identify where drought, heat, water stress, or price volatility could threaten capacity, quality, or delivery. Responses may include supplier financing, flexible procurement planning, weather-informed risk tools, and contingency planning, tailored to the realities of each sourcing relationship. Companies can also consider collaborative approaches and co-investment to address shared risks in sectors or geographies. 
4. Protect workers in exposed regions. Identify where direct, contracted, and supply chain workers face heightened risks from heat, wildfire smoke, flooding, water stress, or disease. Measures such as heat action plans, paid disruption policies, worker grievance mechanisms, healthcare access, and local partnerships can protect workforce availability and productivity—and strengthen broader societal resilience—while reducing injury, absenteeism, and disruption costs. 
5. Safeguard natural assets that support business operations and supply chains. Assess where forests, freshwater systems, soils, wetlands, coastal ecosystems, and other natural assets provide critical services and where climate change and ecosystem degradation create compounding risks. Investments in ecosystem restoration, water stewardship, community-led sustainable land management, and other nature-based solutions can reduce physical risks, protect resource availability, and strengthen long-term value-chain resilience.
6. Collaborate to address shared climate risks. Many climate risks cannot be addressed cost-effectively by one company alone. Working with peers, suppliers, governments, financial institutions, civil society, Indigenous Peoples, and local communities can enable co-financing, reduce maladaptation risk, and scale solutions across shared landscapes, watersheds, sourcing regions, and manufacturing and industrial zones.

How BSR Can Support 

Conclusion

As physical risks become more frequent and severe, and the 2026–27 El Niño stands to amplify those impacts, climate adaptation is becoming a business and financial imperative. This El Niño cycle provides an immediate opportunity to test business readiness and identify where investment is most needed.

El Niño may expose weaknesses in adaptation strategies, business continuity plans, and supplier relationships. Rather than viewing El Niño as an isolated weather event, companies can use it as a practical stress test to identify vulnerabilities, prioritize investments, and improve preparedness for a future of greater climate volatility.

Effective adaptation protects more than operations and physical assets; it strengthens the workers, suppliers, communities, infrastructure, and natural systems on which businesses depend. Companies that integrate adaptation with nature preservation, and human rights into long-term business planning, will be better positioned to anticipate disruption, recover faster, and preserve long-term value. In doing so, they can also strengthen value chains, community resilience, and the ecosystems that support sustained business performance.