This article is part of Bain’s 2026 CEO Sustainability Report

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Imagine you’re the CEO of a confectionery company. In early 2023, your company runs a climate assessment that finds your risk manageable, with no red flags. Cocoa, one of your largest raw materials expenses, is sourced from multiple countries and suppliers across Latin America and West Africa.

Less than 18 months later, events take a sharp turn as climbing temperatures in West Africa and the rapid spread of swollen shoot disease contribute to a third year of insufficient cocoa supply and a 300% rise in prices. Yes, your company has multiple cocoa suppliers, but global prices are determined by production in a single, hard-hit agro-climatic zone across Cote d’Ivoire and Ghana that accounts for more than half of the world’s crop.

Production volumes drop sharply, amplified by decades of underinvestment in aging farms, challenging farmer economics, governance failures, and financial speculation. Over time, prices will stabilize. But first, margins compress, and you must reformulate to reduce cocoa content. Why, investors ask, didn’t the assessment flag all this?

Indeed, you asked a reasonable question, "Have we diversified our supply chain?" and received a reassuring answer. Unfortunately, it was the wrong question for your business.

Cocoa is one commodity in one sector, but every sector is vulnerable to physical climate risks. Most CEOs understand the critical need for resilience, but they’re unsure how to build it. We consistently see companies asking three questions that sound right but that often prove misleading: Aren't we insured? What's the ROI? Haven't we diversified? Each produces a confident answer to the wrong problem.

Climate disruption doesn't just destroy value; it moves it, reliably and quickly, toward those better prepared. We suggest three more productive questions for executives facing climate risk: Consider the points at which your business might be most vulnerable, assess how to create competitive advantage, and explore solutions beyond diversification.

And climate is just one risk among many that CEOs must navigate today, from geopolitical shocks to regulatory shifts and material constraints. The good news is that the way of thinking we lay out in this article helps to build resilience across a broad spectrum of risks.

Wrong question: Aren’t we insured against climate risk?

Embedded in this first frequently asked question is an assumption that climate change is mostly a physical risk to property and that insurance covers that exposure. It’s true that in moments of crisis, insurance usually covers physical damage to buildings and some business interruption, but it typically doesn’t fully cover many other potential impacts, including customers lost, cash-flow degradation from reduced demand over time, the supply chain that reroutes around you, regulatory fines, reputational damage, and margin compression from input inflation. And the chronic effects of climate change, things such as water access and labor productivity during heat stress? Those typically can’t be insured at all.

In Thailand’s 2011 floods, Toyota was lucky; its plants did not flood. Even so, due to the disruption of its broader supply chain, the automaker missed its production plan by approximately 260,000 vehicles. Later, analyst reports found that revenue losses were not covered for many affected companies, including car manufacturers, because supplier disruptions related to flooding were not included in the contingent business interruption policies.

Such indirect and cascading business impacts often exceed the direct physical damage of a climate event. According to Swiss Re and Lloyd’s, damage to logistics nodes or other supply disruptions as well as damage to energy, water, and transportation infrastructure are often the greater exposure. The resulting business interruption can damage a company’s brand and reputation for the long term.

Insurance and hedging buy time, but they can’t replace a comprehensive risk strategy. Data shows that natural disaster losses are growing between 5% and 7% each year in real terms while the gap between total and insured losses remains large (see Figure 1). Hedging buffers short-term price volatility, but when the disruption is structural, the hedge rolls off into a changed reality. While insurance is a helpful tool for managing through crisis events, it won’t sufficiently address critical climate challenges in the broader supply chain or those that involve chronic risk.

Figure 1

Ask instead: Where can our business break?

Different businesses are exposed in different ways. For some, their weakness is concentrated asset exposure. Others are vulnerable beyond their own walls, in network nodes, correlated supplier risk, or inputs that are structurally threatened.

Companies can start to answer this question by mapping the full value chain from their own assets through their suppliers, including critical inputs, key logistics routes, and customers. Then, they can determine which risks can’t be insured, including indirect and cascading impacts, and quantify exposure at each potential breaking point. With a broader view on risk, companies can deploy a full range of resilience strategies far beyond insurance.

A tourist destination may be able to recover from a damaging wildfire; it won’t survive increasing heat and drought leading to a chronic decline in travel, visitors, and ultimately cash flow. The summer after the extreme heat of 2022, planned Mediterranean travel dropped 10%, according to the European Travel Commission, as visitors chose cooler destinations. This summer's record heat wave, which has Spain topping 45°C, has further raised concerns about the long-term economic impact of steadily warming summers.

Wrong question: What’s the ROI on resilience?

For certain businesses, physical climate risk can pose potentially catastrophic, hard-to-predict tail risk, similar to that of a cyberattack. When those companies discuss the return on their resilience investment, rather than focus on near-term financial impact, they’d be better off managing resilience as a business necessity akin to cybersecurity. No board expects a three-year payback on their cybersecurity program. The question isn’t whether to invest but how much.

Ask instead: How can we thrive even as others fail?

Properly answering this question requires overcoming two misconceptions—namely, that resilience is expensive and that the only return is loss avoidance.

Misconception No. 1: Resilience is expensive. Most businesses make decisions every day that will determine their climate exposure without considering or accounting for their climate cost. Retrofitting after the fact can cost orders of magnitude more and may not be possible for decades for long-lived assets. What if, instead, every site selection, asset design, asset refurbishment, contract renewal, and capex approval were treated at the beginning as an opportunity to embed resilience at marginal cost?

Our analysis of almost 150,000 assets in 12 sectors shows that these moments that matter exist for every asset, but when they occur and how often differs greatly by sector. Solar and data centers have short cycles and frequent moments that matter (see Figure 2). For offshore wind, liquefied natural gas, and nuclear power that’s being built today, those moments are now, during design, and before they even come online.

Solar Data centers

Figure 2

Figure 2

• Solar
• Data centers

Figure 2

Figure 2

More established, capital-intensive sectors such as cement, steel, and ethylene have useful lives measured in decades and refurbishment cycles of 25 to 35 years. For them, each scheduled refurbishment is a rare, high-stakes opportunity (see Figure 3).

Figure 3

Misconception No. 2: The only return is loss avoidance. Climate shocks don’t just destroy value; they transfer it.

The great majority of Publix supermarkets sit in hurricane zones in the southeastern US. Following the 2004–2005 storm season, which forced hundreds of stores to close, the company spent more than $100 million on 400 backup generators in anticipation of future storms. In 2017, when Hurricane Irma hit Florida, Publix was able to reopen most of its storm-shuttered stores within two days, well ahead of peers, thanks to its forward planning, and attribute $250 million in revenue to hurricane-related demand. The company has continued to enjoy steady growth since.

Publix added revenue and market share growth, thanks to its strong performance after Irma, but it is also critical to avoid losses when possible. In 2018, Europe’s Rhine River set record-low water levels and prevented chemical producers from shipping their products and raw materials, forcing them to shut plants and declare force majeure. That crisis cost BASF $280 million, and afterward, the company invested in early-warning systems, low-water barges, and alternative logistics. When water dropped again in 2022, those investments meaningfully reduced both the number of days that BASF's business was disrupted and its shipping costs.

Today, with Rhine water levels hitting new record lows, Hungary’s sole nuclear power plant being forced to shut down due to record-low water levels in the Danube, and wildfires blazing across different regions, European companies are recognizing that they must follow BASF’s lead and prepare for a new climate reality.

The goal is not to be perfectly resilient. That’s not possible. It is possible, however, to be more resilient than competitors, and the best moment to take these steps is up front and often in sync with natural upgrade and investment cycles. Late movers may find their options limited.

Wrong question: Haven’t we diversified our suppliers?

For many companies, the biggest climate risks are upstream in the potential impact on availability, price, or input materials. The natural response is to seek protection by diversifying. Unfortunately, for globally traded commodities, a supply shock anywhere drives up prices everywhere, and diversifying your suppliers or sourcing regions doesn’t insulate you from that. And for inputs that are perishable, don’t travel well, or can only be produced in specific conditions, geographic options are inherently constrained.

Across sectors, it’s common for critical production to concentrate in a handful of climate-exposed places: Palm oil is found in about half of all packaged supermarket products, and roughly 85% of palm oil comes from Indonesia and Malaysia; many semiconductor fabs are in drought-prone Taiwan; pharmaceutical companies rely on water-stressed regions of India and China for key ingredients; and critical minerals for technology and other products sit in arid mining belts.

While diversification can help, it’s clearly only one part of a comprehensive approach to climate risk.

Ask instead: What keeps supply flowing when diversification isn’t enough?

Start to answer this by identifying the input materials at risk, where that risk is correlated across suppliers and regions, and the implications for your ability to serve customer demand. Two paths follow from there.

First, consider what flexibility you have to substitute materials or serve your customers with alternatives. Value chains that depend on palm oil, for example, can be made more resilient by developing ways to reformulate, using other oils if supply runs short or prices spike. Where feasible alternatives don’t exist, build flexibility into other aspects of operations, including adding redundancy or buffer stocks and securing direct agreements with suppliers that lock in volume and price over the medium term.

For inputs that remain exposed even while those levers are exhausted, engage upstream to make the supply source itself more resilient. Strengthen suppliers' own capabilities, fund R&D (for example, into adaptable climate-resilient crop varieties), and develop new production regions early enough to carry real volume when they're needed. This is the path of Nestlé's “Nescafé Plan 2030,” which commits more than $1 billion to coinvesting with farmers in Brazil and Colombia on regenerative agriculture, high-yielding climate-resilient coffee varieties, and agroforestry.

Asking the right questions changes everything

By asking the right questions, executives can build resilience, create competitive advantage, and avoid the potentially terminal risk of unmanaged climate exposure. Seizing the moments that matter to invest in adaptation and resilience and protect value at little to no incremental cost is critical.

The executive who asks, “Are we insured?” or “Are we diversified?” gets a pass, but on the wrong test. Leaders on climate resilience over the next decade will ask the right questions and then take appropriate action before their exposure is locked in.

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