Living with Climate Shocks: How South Asian Households and Firms Are Adapting to Rising Risks

The report shows that South Asia is already living with severe climate impacts, and while most households and firms are adapting, they rely mainly on basic, low-cost measures that are insufficient for rising risks. It argues that governments should focus on better information, stronger markets, core public goods, and responsive social protection to help people and businesses adapt effectively despite limited public finances.

A study produced by the World Bank’s Office of the Chief Economist for South Asia, "From Risk to Resilience" is a major analytical report, with research contributions from World Bank teams and academic partners including the University of California, San Diego, Yale University, Georgetown University, and global research bodies such as the International Monetary Fund, the International Food Policy Research Institute, the University of Notre Dame’s Global Adaptation Initiative, and the Climate Impact Lab. Using new household and firm surveys, climate data, and economic modeling, the report explains how climate change is already shaping lives and livelihoods across South Asia, and what realistic adaptation looks like in a region with limited public finances.

A Region on the Frontline of Climate Risk

South Asia emerges as the most climate-vulnerable region among developing economies. Extreme heat, floods, cyclones, and erratic rainfall are no longer future threats but everyday realities. Since 2010, natural disasters have affected approximately 67 million people annually. By 2030, nearly 90 percent of the population is expected to face extreme heat, and more than 20 percent will be exposed to severe flooding. Dense populations, already high temperatures, and heavy reliance on agriculture amplify these risks. At the same time, governments face high debt and limited fiscal space, sharply restricting their ability to fund large public adaptation programs. This constraint shapes the report’s central argument: most adaptation is already being carried out by households and firms, not the state.

How Climate Shocks Affect Households

The report reveals that climate risks are disproportionately distributed. Poor and agriculturally dependent households are more exposed to extreme weather and suffer larger, longer-lasting losses. Floods and heat damage crops, reduce incomes, destroy homes, and undermine health, water, and sanitation systems. These shocks also hurt children’s education and long-term human capital. Yet households are not passive. Around 80 percent report having taken some form of adaptation action. Most rely on simple, low-cost measures such as reinforcing houses, raising floors, planting trees, or harvesting rainwater. Heat exposure is also linked to higher migration and more off-farm work, showing that people adjust their livelihoods when pressures rise. Still, more advanced adaptations, like climate-resilient crops, insurance, or major livelihood shifts, remain rare, limited by a lack of credit, insecure land markets, weak labor mobility, and poor access to information.

Firms Under Pressure, Firms Adapting

South Asian firms face growing climate stress. About three-quarters of surveyed firms report having experienced weather shocks in the past five years, with average annual losses equal to about 17 percent of revenues. Managers expect damages to increase sharply in the near future. Firms do respond: roughly 63 percent have taken adaptation measures. However, most actions are incremental, such as installing fans or air conditioners, making small building upgrades, or buying energy-efficient equipment. Larger, strategic responses such as relocating production, changing products, diversifying suppliers, or formal contingency planning are far less common. The report finds that firms with better management practices and more skilled workers adapt more and expect lower losses, highlighting the role of skills, information, and decision-making capacity in building resilience.

Why Beliefs, Information, and Markets Matter

A key insight of the report is that beliefs about future climate risks strongly shape adaptation. Households and firms that expect more frequent or severe shocks invest more in coping measures. Greater certainty about future damage also leads to stronger adaptation. Yet beliefs often diverge from scientific forecasts. Many households underestimate future flood risks, while firms show wide variation in expectations. These gaps matter because underestimating risk leads to underinvestment in adaptation. Beyond beliefs, market failures play a central role. Limited access to credit, weak insurance markets, land and labor rigidities, and regulatory burdens all constrain effective adaptation. Fixing these problems, the report argues, is often more important than creating new climate-specific programs.

What Works and What Governments Can Do

Drawing on a global review of evidence, the report finds that adaptation reduces climate-related damages by about 46 percent on average. Firms tend to achieve larger benefits than households, mainly because they can use technology more easily. The most effective adaptations, however, are often basic public goods, roads, health services, and water systems that protect human capital and keep markets functioning during shocks. These investments deliver “double dividends” by supporting development while also strengthening resilience. At the economy-wide level, climate change could reduce South Asia’s output by nearly 7 percent by mid-century, but market-driven adaptation could offset about one-third of these losses if people and firms can move, invest, and adjust freely. The report’s conclusion is clear and practical: governments should focus on improving information, fixing markets, strengthening core public goods, and scaling up responsive social protection, helping people and firms live with climate change, rather than promising to shield them completely from it.