Adapting to Climate Change through Risk Management

Abstract

Climate change, along with changes in hydrological variables, causes alterations in access to water resources, the intensification of extreme phenomena (such as droughts and floods), and economic, social, and environmental instability. Risk management emerges as an appropriate approach for increasing adaptation to climate change, characterized by its inherent flexibility and the reduction of uncertainties associated with climate change. This approach improves adaptive capacity through transformation and reversibility processes, ultimately reducing the system’s exposure and vulnerability to risks. In this chapter, we delve into key concepts and components related to risk and adaptation, including resilience, exposure, sensitivity, adaptive capacity, vulnerability, and their connections and interactions. Subsequently, we elucidate the methodology for enhancing climate change adaptation through risk management, utilizing a variety of processes and tools. Furthermore, we provide an illustrative example of the application of the portfolio robust decision-making tool for climate change risk management in the integrated water resources system.

1. Introduction

The ongoing phenomenon of climate change, characterized by long-term alterations in average climatic conditions and fluctuations, has brought about significant transformations in the components of the hydrological cycle. This includes changes in precipitation patterns, snow melting, evaporation, and soil moisture dynamics, leading to a cascade of consequences, including heightened risks associated with extreme events, such as droughts and floods, and uncertainties in accessing water sources [1]. Therefore, one of the paramount challenges facing the twenty-first century is the imperative to mitigate the risks associated with climate change and maintain the sustainability of systems under the effects of this phenomenon. This challenge is particularly pronounced in sectors reliant on water resources, where the impact of climate change poses a significant threat.

In response to the inescapable impacts of climate change on susceptible systems and their sustainability, the imperative of addressing adaptation to climate change is raised. The concept of adaptation, originally applied to the study of biological systems in the 1970s [2], has since transcended disciplinary boundaries, finding applications in diverse scientific fields, from ecology to social sciences, psychology, and economics. Although the term is not novel, it has gained prominence in recent years as a primary response to the impacts of climate change.

Various definitions of climate change adaptation have been proposed, with the Intergovernmental Panel on Climate Change (IPCC) characterizing it as the adjustment of natural or human systems in response to occurred or expected stimuli or their effects. Adaptation aims to minimize damages and vulnerability or seize opportunities [3, 4]. The United Nations Framework Convention on Climate Change (UNFCCC) defines adaptation as practical measures to shield countries and societies from potential disruptions and damages caused by climate change effects. Furthermore, adaptation is viewed as a dynamic process during which strategies for adjustment, coping, and utilization of the consequences of climate events are reinforced, developed, and implemented [5]. In essence, adaptation represents the process or outcome that reduces harm or the risk of harm, while achieving benefits associated with climate variability and change [6].

The IPCC has delineated various forms of adaptation into three distinct categories: self-adaptation, independent adaptation, and planned adaptation. Self-adaptation refers to measures taken before the tangible effects of climate change become apparent. An example of self-adaptation is social learning in society to adapt to possible risks, such as flooding [7]. On the other hand, independent and planned adaptation strategies come into play after the observation of climate change effects. The disparity between independent and planned adaptation lies in the approach to responding to climate stimuli. Independent adaptation relies on individual characteristics, unfettered by public organizational intervention. It draws from people’s perceptions, scientific information, and experiential knowledge, allowing for swift implementation [8]. In contrast, planned adaptation involves the formulation and implementation of policies that are adopted based on awareness and assessment of changing conditions, and the planning and execution of these measures (such as process, operational, and institutional measures) may necessitate a substantial amount of time [9]. It is noteworthy that the risk of climate change and the vulnerability of systems that lack adaptation measures are significantly higher compared to systems where adaptation is planned.

Numerous sources of uncertainty associated with climate change and its adaptation, encompassing factors such as the accuracy of climate change predictions, the impact of climate change on systems, the nature of adaptation strategies, the level of stress experienced by the system, and the efficacy of adaptation measures, underscore the appropriateness of adopting a risk management approach for climate change adaptation. In this regard, the significant impact of climate change on the water sector and challenges arising from climate-induced uncertainties in water supply and demand, along with their consequential economic, social, and environmental effects, have amplified the ineffectiveness of the traditional management approach (command and control). This issue has led to a growing inclination toward risk management for climate change adaptation within this sector.

This shift prompts crucial questions: Within the risk management approach, adaptation can be formed under which processes, and what mechanisms are employed at each process to reduce the effects and risks associated with climate change? The elucidation and design of these processes pave the way for effective risk management implementation, within diverse systems. Further questions extend to the factors influencing the reduction of vulnerability of an adaptive system to external threats like climate change. In other words, how is the connection and the impact pathway of the adaptive capacity on vulnerability? Considering the concepts of resilience and vulnerability, how is it possible to increase adaptive capacity and reduce risk through adaptation measures? This understanding not only clarifies the interplay of these concepts but also serves as a guiding framework for bolstering adaptive capacity within systems.

Additionally, the selection of adaptation measures prompts an essential question: what are the characteristics that define an appropriate method and model for evaluating the effects of climate change and selecting suitable adaptation strategies to reduce risk? These considerations are paramount in navigating the complex landscape of climate change impacts and ensuring the judicious choice and implementation of adaptation measures.

To address the above questions, various review studies in the fields of water resources management under climate change, adaptation concepts and processes, and assessment of adaptation strategies were reviewed [10, 11, 12, 13, 14, 15, 16, 17, 18, 19]. While these studies are categorized as review papers, their scope has been confined to specific dimensions of adaptation, neglecting the crucial exploration of interrelationships among various dimensions of adaptation and risk. Therefore, they are unable to answer the questions raised in this field.

This chapter addresses this gap by delving into diverse dimensions of adaptation. It scrutinizes the risk management approach, the adaptation processes, and the intricate connections between adaptation, vulnerability, and resilience concepts for adaptation, especially in the water sector. Through an examination of conceptual advancements, along with an assessment of the pros and cons of different approaches and processes, the chapter presents a combination of the authors’ findings to create an adaptation system to climate change. Therefore, it provides valuable knowledge and insights, enhancing our comprehension of adaptation and delineating its various facets. Consequently, it offers a model for augmenting adaptation to climate change through a risk management framework.

2. Concepts related to adaptation

2.1 Impact of vulnerability components changes on adaptation and risk

Effectively responding to the challenges posed by climate change necessitates a strategic understanding of the relationship between adaptation and vulnerability. The initial step in adapting to the conditions created by climate change involves identifying vulnerable points. Subsequently, solutions are adopted to enhance the system’s capacity to mitigate these vulnerabilities. Therefore, vulnerability analysis is necessary to achieve adaptation.

Various definitions of vulnerability exist, one of which characterizes it as the extent of a natural system’s or human society’s inability to cope with the adverse effects of climate change, variability, and extreme events. This depends on the changes in climate, sensitivity, and adaptive capacity within the system or society [20]. Similarly, vulnerability is described as a condition influenced by physical, social, economic, and environmental factors or processes, intensifying society’s sensitivity to hazards [21]. Vulnerability also pertains to the amount of damage caused by specific dangerous events. Climate vulnerability, therefore, signifies the degree of sensitivity or inability of a system to withstand the adverse effects of climate change, encompassing fluctuations and extreme events that depend not only on the sensitivity of a system but also on its adaptive capacity [22]. According to the IPCC definition [23], vulnerability is a function of three factors: exposure, sensitivity, and adaptive capacity. In the context of climate change, “level of exposure “ is defined as the intensity of changes in climate variables, while “sensitivity” denotes the extent of the effects of climate change on the system. “Adaptive capacity” reflects the system’s ability to reduce potential damages and use opportunities. Consequently, increasing exposure and sensitivity components heightens vulnerability, whereas an increase in the system’s adaptive capacity reduces vulnerability. Figure 1 illustrates the relationship between vulnerability components and the impact of adaptive capacity on vulnerability.

Figure 1.

Relationship between vulnerability components and their effects.

Risk emerges from the interaction between hazards and vulnerability. Consequently, alterations in vulnerability components impact the level of risk. By mitigating vulnerability through adjustments in its constituent elements, such as enhancing adaptive capacity and reducing exposure, the risk is concurrently diminished. Figure 2 illustrates the connection between vulnerability, hazard, and risk.

Figure 2.

The connection between vulnerability, hazard, and risk.

2.2 The relationship between adaptive capacity and vulnerability and resilience

The concept of vulnerability exhibits deficiencies in several key dimensions, with shortcomings including a disproportionate emphasis on evaluating system issues over its core functionality, more attention to the state of the system than its active processes and mechanisms, an oversight in neglecting to analyze the system’s mission within the drawn landscape, and a disproportionate focus on risks or damaging components.

Simultaneously, prioritizing the system’s survival takes precedence over scrutinizing its separate issues. Consequently, to assess the system’s stability in fulfilling its expected function, introducing an additional concept becomes imperative, and this can be accomplished by incorporating the notion of “resilience.” It is important to highlight that potential connections and related concepts exist between the frameworks of vulnerability and resilience, as elucidated by [24], and these can be regarded as mutually complementary.

The shift in perspective from the vulnerability-oriented focus on system factors to the resilience-oriented emphasis on processes and system relationships is evident in the literature on adaptation [25]. Until 2008, adaptation measures in the continents of Asia, Africa, and Europe predominantly centered on vulnerability, addressing processes such as ensuring water availability for pastures or enhancing the efficiency of irrigation systems. However, in line with the 2014 recommendations from the IPCC, there has been a discernible transition toward greater consideration of system functions in adaptation measures. This is reflected in initiatives like local development planning and the integrated management of water and soil resources [26].

The interrelationship and conceptual framework involving “vulnerability,” “resilience,” and “adaptive capacity” within the context of climate change impacts are elucidated in Figure 3. This visual representation illustrates the historical trajectory of the system, encountering climate risks within the bounds of natural fluctuations (climate changes). During these fluctuations, the system operates within the “resilience” range, sustaining stability under constant climatic conditions. However, the advent of climate change imposes new trends on the system, which is beyond the limit of its resilience and puts the system in a vulnerable area.

Figure 3.

Conceptual relationship between climate change, vulnerability, and adaptation (in the sense of resilience). Reference: Adapted from UKCIP [22].

In reaction to these alterations, Adaptation measures strengthen the adaptive capacity of the system through two paths: modifying the flexibility range and reducing vulnerability. Ultimately, combining these pathways delineates a new boundary (blue part) that protects the system against emerging climate fluctuations—a boundary known as anti-climate.

Section 3 delves into a comprehensive explanation of the execution of these two pathways, elucidating the enhancement of adaptive capacity under the heading of adaptation processes.

3. Adaptation process

In the majority of research, the term “adaptation” has historically been construed as the idea of reverting to the past [27]. Within this conceptualization, adaptation represents a system’s capacity to return to its initial state and a stable point of equilibrium following the disturbance. This static form of adaptation is often referred to as reversibility adaptation or incremental adaptation in certain studies, wherein the system’s structure, performance, and feedback are maintained to reduce vulnerability [28].

Over time, this definition has evolved, moving away from a static interpretation to embracing a dynamic concept [29]. In the revised definition, adaptation does not aim to achieve the system’s initial equilibrium but emphasizes sustaining the system, absorbing changes, and adapting to disturbance conditions through gradual transformation, ultimately reaching a new equilibrium. In other words, the adaptive capacity of the system in dealing with changes and disturbances increases by transferring the characteristics of the system from one state to another. This perspective, known as transformation adaptation, allows for the attainment of a new equilibrium point by altering the structure and purpose of the system, a concept aligned with the modification of the resilience range (Section 2). Figure 4 illustrates a schematic representation of the system’s initial equilibrium state and the newly created equilibrium state.

Figure 4.

System equilibrium in the initial state and the new state.

The viewpoint of transformation adaptation distinguishes between the two concepts of sustainability and stability; instead, it introduces criteria such as adaptability, flexibility, and dynamic instead of control, resistance, and static. In transformation adaptation, the concepts of diversification and modularization (transformation into smaller elements with independent functions) along with decentralization are proposed [30]. In this adaptive methodology, the trait of diversification enables the system to manifest different responses amid conditions of pressure and disturbance. An exemplification of this adaptive strategy is observed in the cultivation of crops with varying sensitivities to climate changes. Moreover, the features of modularization and decentralization, particularly when elements share similar functions, can reduce the risk temporally and spatially, preventing the entire system from being under pressure simultaneously and in the same location. An illustrative example is the cultivation of a desired crop in diverse locations to distribute and minimize potential risks. Table 1 provides a comparative analysis of two adaptation processes.

	Reversibility adaptation	Transformation adaptation
Objectives	Maintain the purpose and structure of the system	Change the purpose and structure of the system
	Return to the initial equilibrium state	Create a new equilibrium state
Attributes	Static equilibrium adaptation	Dynamic equilibrium adaptation
	Dynamic-resilience-adaptation flexibility	Static-fortification control-resistance

Table 1.

Objectives and characteristics of the two adaptation approaches.

3.1 Adaptation process in water resources

Recognizing the significance of adapting to climate change within the integrated water resources system, this section delves into two distinct paths of the adaptation process aimed at restoring balance to the water resources system. As depicted in Figure 5, factors such as climate change and excessive consumption contribute to a decline in available water. Given the pivotal role of water as an interface between various subsystems, this decline precipitates adverse effects on the economic, social, and environmental performance of the system, ultimately leading to its degradation.

Figure 5.

The effectiveness of different approaches to system reconstruction and restoration. Source: modified Gurr et al. [32] for water resources.

In this situation, adaptation can be pursued through two distinct pathways. In the reversibility process, actions are undertaken to revert to the original state and the initial equilibrium point. Depending on the system’s capacity to recover, these actions may either fully restore the system to its initial state (restoration), or partially reinstate the conditions preceding the degradation (rehabilitation), thereby enhancing system conditions [31, 32]. Conversely, in the transformation adaptation process, structural changes increase the system’s resilience by creating a new equilibrium point. The adaptive method of transformation in water resource management with a protective approach can be applied by reallocating water resources and creating new equilibrium conditions for the system. So, by changing the structure of the system through diversifying economic activities and allocating water resources to them, the system’s sensitivity and adaptive capacity will decrease and increase, respectively. Samples of various implemented measures through both reversibility and transformation processes at different temporal and spatial scales in countries are shown in Table 2. In addition, the comprehensive classification of these adaptation processes within the system is illustrated in Figure 6.

Reversibility approach	Source	Transformational approach	Source
Water management and agricultural water-saving technologies in China and India	[33, 34, 35, 36]	Changing the cultivation pattern (changing rice r to rice and cotton in China), (changing rice cultivation to apple in India), (changing rice to alfalfa and safflower in Kazakhstan), and (wheat to fruit trees in Morocco)	[37, 38, 39, 40, 41]
Building Local Irrigation Infrastructure in Chile	[42]
Restoration of destroyed areas through the creation of protection zones in Ethiopia	[43, 44, 45, 46]	Change in economic activities (allocation of agricultural land to fish farming in China), (allocation of rice cultivation land to aquaculture in Bangladesh), (change from animal husbandry to rainfed farming and beekeeping in Kenya), and (switches between cropping and transhumant livelihoods in Burkina Faso)	[47, 48, 49, 50, 51, 52]
Dikes and inlet barriers for the Gulf Coast in the United States	[53]

Table 2.

Adaptability measures through reversibility and transformation approaches.

Figure 6.

Classification of adaptation methods. Source: Author.

3.2 Advantages and disadvantages of climate change adaptation processes in the water resources system

Adapting to climate change within the transformational process holds the potential for heightened success in ensuring the sustainability and preservation of the system. This success is attributed to the removal of flawed structures and the establishment of a more flexible structure that exhibits reduced sensitivity to the impacts of climate change. Such achievements gain particular significance within the integrated water resources system grappling with the challenges posed by climate change.

In the realm of water scarcity, the challenge extends beyond the repercussions of climate change alone; we consistently face mechanisms that perpetuate the escalating trend of consumption. However, adaptation strategies centered around reversibility cannot merely address the water shortage resulting from climate change. Consequently, a shift toward adaptation strategies is imperative, focusing on structural changes to control the escalating mechanisms of consumption within a transformation process. Furthermore, beyond its impact on the quantity of available water resources, climate change also induces alterations in the intensity and frequency of extreme events. In such circumstances, the transformation adaptation process proves to be more effective than the reversibility adaptation process due to the flexibility and heightened system carrying capacity.

It is essential to note that the prescription of transformation adaptation results in a significant shift in water consumption and may leave no alternative, but we should embrace this approach in some cases. However, implementing such a change requires a fundamental change in the economic and social structures that have evolved over many years in a given region, inevitably giving rise to path dependency.

Path dependence emerges as a formidable obstacle to the acceptance and success of this form of adaptation. Conversely, reversibility adaptation strategies refrain from instigating substantial changes to the region’s structure. Since they do not deviate significantly from the path taken, they hold the potential for greater acceptance and success compared to transformation adaptation. Nevertheless, the development capacities and preparations created through reversibility adaptation can serve as facilitating factors in transitioning toward transformation adaptation [54].

The cultivation of awareness among stakeholders becomes paramount for the success of climate change adaptation processes [55]. The local capacities and flexibility for transformation adaptation can be created by local stakeholders through social learning processes, representing the best option from a community-oriented perspective for transformation adaptation measures. This form of adaptation is regarded as reversibility adaptation [56]. In this regard, reversible adaptation strategies can be effective in the short to medium term, and when aligned with training and capacity building, they lay the groundwork for transformation adaptation strategies [57].

Considering the merits and drawbacks of distinct adaptation processes, research endeavors have been undertaken to optimize their application across various countries. In New Zealand, in response to challenges faced by farmers arising from shifts in water availability, climate change, and land use alterations, localized research was conducted. Building on these findings, a comprehensive program for the regional adaptation path was formulated. This program recommended reversibility adaptation for the short-term and proposed transformation adaptation for long-term sustainability [58]. Subsequent, prerequisites for transformation adaptation were identified, including a shift in prevailing attitudes and public understanding [59] and legislative modifications [58]. Also, in Australia, to achieve sustainability, four adaptation pathways were defined based on farmers’ experiences. Research outcomes indicated that sustainability could be attained by following several paths together, both individually and as a group [60].

4. Risk management approach for climate change adaptation

The risk management (RM) approach, initially introduced by Wideman in 1992, has undergone enhancements based on user experiences in diverse projects marked by uncertainties [61, 62]. The uncertainty in climate forecasts, stemming from the numerous global climate change scenarios and models, has prompted the adoption of a risk management approach in climate change adaptation efforts in recent years [63].

The essence of the risk management approach is based on the development of adaptation strategies for both current and anticipated risks. These strategies are evaluated using a wide range of possible future scenarios to create robust adaptation strategies and measures [64]. Rather than utilizing quantitative data of future climate scenarios solely for impact assessment, this approach employs such data to assess the robustness of proposed strategies, aligning with the principles of robust decision-making [65].

In the risk management approach, the risk is characterized as a function of the probability of repeating the consequences, directing attention toward the consequences of climatic events rather than solely focusing on the probability of those events occurring [64]. A notable advantage of the risk-based approach, as opposed to a top-down approach, lies in early stakeholder involvement. They facilitate the identification of potential adaptation strategies, which are subsequently subjected to analysis across a diverse array of scenarios.

Systems encounter uncertainties in predicting climate change, its effects, and changing conditions over time, leading to uncertainties regarding the potential impact of adaptation measures on the system.

Over the past two decades, numerous methodologies have been developed to address these uncertainties. In this regard, the risk management approach, owing to its inherent flexibility, can adeptly leverage an extensive array of these methodologies. Moreover, climate change impact assessment, adaptation, and vulnerability have common elements with risk management, including the need to manage uncertainty, communication between hazards and consequences, communication between technical experts and stakeholders, risk reduction by reducing hazards and the consequences of these hazards, and formal processes to link all these activities are [63].

Due to the high impact of climate change on water resources, the risk management approach has been extensively applied for climate change adaptation across various countries (refer to Table 3). Drawing from the experiences of scientists [66] in managing transboundary water resources, the utilization of this approach in climate change-affected resource management is viewed as a natural development. In this study, six key steps were suggested in the risk management process for transboundary water resources, encompassing risk assessment planning, risk identification, risk assessment, risk response plan, control plan, and continuous evaluation of the program.

Application	Source
Risk management for transboundary water conflict resolutions	[66]
A risk management approach to climate change adaptation (New Zealand and Australia)	[67]
Management of water resources planning by US agencies, including the US Army Corps of Engineers	[71]
Thames River Barrier, energy production in the Niger Basin, water management in Yemen, and flood risk management in a large southeast Asian metropolis	[69]
Risk management to reduce the effects of climate change in the Southern Mediterranean Countries	[72]

Table 3.

Examples of risk management applications in dealing with climate change in water resources.

Many governments worldwide, including New Zealand and Australia, have embraced risk management as a main approach to assess adaptation options to climate change [67]. For instance, the South Australian Government’s Department of Environment, Water, and Natural Resources has established a process framework for risk management in water planning and management. This framework addresses natural resource risks, community values, and the effective performance of management practices. It incorporates key components such as communication and consultation, monitoring and evaluation, context building, risk assessment (including risk identification, analysis, and estimation), and risk reduction, ensuring the implementation of activities of communication and consultation, and monitoring and evaluation throughout all stages of the process [68].

Various methods underpin risk management and assessment, developed in diverse frameworks [68, 69, 70]. Among risk management and assessment methods, the flexible robustness methods provide a viable means of planning for changes in water supply and demand under evolving climate conditions. Methods of risk management have found widespread use in American agencies, including the United States Army Corps of Engineers (USACE), for efficient water resource management [71]. Examples such as the Thames River Dam, energy production in the Niger Basin, water management in Yemen, and flood risk management in a major Southeast Asian metropolis, introduced as the applications of the framework of risk management with robust decision-making tools for uncertainty management by World Resources Institute [69].

In the realm of adaptation assessment at both national and local levels, it is suggested to employ risk management approach. Within this context, evaluating adaptation strategies in alignment with key concepts such as vulnerability/resilience, sustainable development, and disaster risk, facilitates comprehension of prevailing policies, managerial practices within communities, existing programs and knowledge, and identifying risks [63].

5. Evaluation and decision-making tools for adaptation strategies

It is imperative to conduct a thorough evaluation of the impacts resulting from adaptation strategies and measures to gauge the efficacy of enhancing the system’s adaptive capacity and resilience, while concurrently mitigating vulnerability and risk associated with climate change. The significance of scrutinizing the effects of adaptation strategies and measures has given rise to various methodological approaches and tools, which are broadly categorized into groups encompassing natural sciences, social sciences, overlapping natural and social sciences, and transdisciplinary [73].

Within the realm of natural sciences-based methods, assessments are carried out through hydrological modeling, hydrodynamic modeling, and integrated evaluation modeling. However, the limitations of hydrological and hydrodynamic modeling methods lie in their challenges of accessing data related to other factors influencing risks at the same resolution, coupled with a deficiency in integrated assessment capabilities. Integrated assessment modeling (IAM) emerges as a suitable option for large-scale (global) assessments, enabling the evaluation of human-environment interactions and the interplay between adaptation and mitigation [74, 75]. Nonetheless, the uncertainty in estimating the costs and benefits of adaptation measures constrains the broader application of these models.

In contrast, methods rooted in social sciences adopt a bottom-up approach and include risk assessment, participatory evaluation, and cost–benefit analysis. The risk assessment method possesses the advantage of determining risk reduction measures and conducting uncertainty analyses, thereby overcoming the limitations associated with IAM [76]. However, drawbacks of the risk assessment method include the mismatch between the time scale of adaptation to climate change and short-term community concerns, as well as the absence of high-resolution future climate information at the local scale and the associated risks.

Recent years have witnessed the development of participatory evaluation methods aimed at evaluating the impacts of climate change and its adaptation [77, 78, 79]. Notwithstanding the merits of these methods, they exhibit certain limitations, such as subjectivity in stakeholder identification, the selected assessment method, and the stakeholders’ level of knowledge.

Overlapping methods try to solve the shortcomings of social and natural sciences-based methods by combining the elements of them. Environmental assessment models, hydroeconomics models, and water resource systems assessment modeling are examples of overlapping methods employed in this context.

Hydroeconomic models were presented due to the effect of water on economic performance [80, 81]. Initially, hydroeconomic modeling incorporated simulation models in specific fields along with economic equations, yet it fell short of providing a comprehensive evaluation of adaptation options [82]. Consequently, these models were developed over time.

Recognizing the constraints of financial resources and time in implementing adaptation strategies, the integration of decision-making tools with developed hydroeconomic models became imperative, leading to the emergence of transdisciplinary tools. These analytical tools can be applied in combination with all three aforementioned methods.

Decision-making tools consist of two main groups: single decision criterion and more than one decision criterion. The development of transdisciplinary tools first has been done by incorporating common decision-making tools, including single-criteria decision tools (CBA, CEA) and multi-criteria analysis (MCA), in conjunction with hydroeconomic models [73, 83]. In the following, Robust decision-making tools were integrated with hydroeconomic models due to their relative superiority in addressing risks [84].

In summary, the evaluation of climate change adaptation strategies necessitates integrated dynamic models that account for climatic and non-climatic uncertainties affecting future conditions. These models should encompass various economic, social, and environmental factors, as well as mechanisms evolving over time. Additionally, decision-making tools alongside these models are imperative to the judicious selection of strategies, taking into account both risk factors and stakeholder participation. Below is an example of a suitable tool with the desired features.

6. Climate change adaptation through modern portfolio theory in risk management approach

The Modern Portfolio Theory (MPT) stands out as a robust decision-making tool suitable for reducing risk. Its distinctive capability lies in its capacity to calculate climate risk and the risk-taking of decision-makers. Rooted in economic theory, this model serves as a strategic planning methodology for investments in conditions of uncertainty. It simultaneously incorporates two criteria economic risk and economic return, within a unified mathematical model.

The portfolio optimization process involves selecting the optimal combination of financial assets, aiming to maximize investment returns while minimizing risk. At its core, MPT posits that by investing in assets with low correlation with each other, the inherent risks associated with each asset can be mitigated, resulting in a stable return with reduced overall risk [85].

By expanding the number and diversity of assets and allocating investments to assets with more return and less risk, MPT effectively manages both systematic risk (about changes affecting all activities) and unsystematic risk (related to changes specific to each activity). In actuality, MPT mitigates the system’s susceptibility to fluctuations by leveraging the diversification feature. This, in turn, diminishes the system’s vulnerability and risk.

According to the recommendations of the Intergovernmental Panel on Climate Change, the application of MPT in climate change adaptation planning has gained prominence in recent years across various sectors. Given the substantial impact of climate change on the water sector, the concept of portfolio risk distribution has been employed in investments to devise adaptation strategies and measures. For instance, within the domain of water supply, the portfolio approach integrates existing infrastructure with other options such as protective measures and water transfer. This method yields a diverse range of water supply portfolios, effectively reducing the required costs to meet demand and enhancing adaptability to evolving climatic conditions.

Moreover, recognizing the pivotal role of water in the agricultural sector, MPT has been instrumental in offering varied strategies to manage climate change-induced risks [86]. Table 4 provides illustrative examples of these studies. In these investigations, diversification has been leveraged as a key feature to mitigate the risks associated with climate change.

Surface water and groundwater resources management	[87, 88]
water quality	[89]
Coping with flood and drought extreme events	[90, 91]
Reducing environmental risks	[92]
Water distribution (reducing the risk of water distribution network)	[93]
Risk reduction in garden systems	[94]
Water supply (irrigation water, urban water, and areas with a common water source)	[95, 96, 97, 98, 99, 100, 101]
Combined planning of water supply and demand	[102]
Combination of various infrastructures of water resources	[103]
Land use change and cultivation pattern change	[88, 104, 105]
Diversity in products and sources of income for farmers	[106]
Diversification in products by examining the gross margins	[107]

Table 4.

The application of modern portfolio theory for adaptation to climate change in the water and agriculture sector.

In the realm of water allocation, wherein water functions both as a final and intermediate product within various economic sectors, water can be assumed as capital. The uncertainty associated with accessing this vital resource under climate change introduces a level of unpredictability to the economic performance of the system.

The MPT model, when applied to water allocation, strategically allocates this finite resource to activities characterized by higher economic efficiency and their economic performances are not affected by changing climate conditions simultaneously and to the same extent. Developing this set of activities with less sensitivity to climate fluctuations requires structural change. Within the revamped structure, enhanced adaptability is realized by minimizing uncertainty and fostering economic stability, resulting in a reduced vulnerability of the system. Consequently, the MPT, through the transformation adaptation process, serves as an effective strategy for risk management in climate change adaptation.

Since in the MPT model, a set of optimal points (returns and risks) is produced, the stakeholders with different utilities can choose one of the points based on their degree of risk tolerance, and in this way, the risk-taking of stakeholders is considered in the decision for water allocation. In this way, risk management by the MPT ensures a holistic evaluation that considers both the systemic vulnerabilities and the varying risk tolerance levels of involved stakeholders.

Given the significant influence of water on both social and environmental systems, disregarding these dimensions may result in the ineffectiveness of climate change adaptation strategies [108]. Also, according to section (2–3), reversibility adaptation strategies can increase the adaptive capacity as a complement to the transformation adaptation strategy (allocation of water based on MPT). This dual approach, combining both reversible and transformation adaptation processes, presents a comprehensive strategy for risk management and ensuring successful adaptation to climate change, which was first proposed by the author of this chapter in the form of the water resources integrated dynamic model and MPT model were presented [109]. This research was conducted in a catchment of a lake. In this research, the MPT theory was developed with the social criterion, and water was reallocated as a decision variable between the economic activities of agriculture, services, and industry; in this way, this portfolio plane included optimal points produced. This reallocation by the transformation process reduced the basin’s sensitivity to climate change and increased its adaptive capacity. In addition, reversible adaptation strategies were presented to moderate the effects of climate change, and these strategies were evaluated in the integrated model; then, the portfolio planes of these strategies were prioritized on the axes of return, risk, and Gini coefficient of the MPT model. Finally, an optimal point based on the risk tolerance of the beneficiaries was selected from the selected strategy screen for allocation in climate change conditions. The results of this research show the improvement of the economic performance of the basin (about 1.2 times) by reallocating more water to the service and industry sector in the transformation adaptation process, preserving the environment, and restoring the lake by saving water consumption in the agricultural sector in reversibility process.

7. Conclusions

The pressures out of system capacity brought to it due to environmental changes, including climate change, and the effects they have on different parts of the system take it out of balance. Finally, this situation leads to the failure of the system. In this situation, the only way to save and survive the system against pressures is to create adaptations so that the system adapts to new conditions. Achieving this adaptive system is possible through an efficient risk management approach. According to IPCC’s definition, climate risk is a function of danger, exposure, and vulnerability, so the risk can be reduced through changes in vulnerability components, i.e., increasing adaptive capacity and reducing sensitivity.

Two processes are identified for dealing with risk of changes beyond the system’s capacity: reducing vulnerability through adjustment measures (reversibility adaptation) or increasing resilience by establishing new equilibrium conditions (transformation adaptation). Research findings indicate that reversibility adaptation may not always restore the system to its initial state, while transformation adaptation leads to a new and sustainable equilibrium by altering the system’s structure.

If structural changes in the transformation adaptation process are made based on the principle of decoupling, it not only enhances adaptive capacity but also establishes a stable (dynamic) balance over time, promoting resource preservation and promoting economic growth with reduced resource consumption.

In the decoupling method, resources are allocated to sectors with a higher economic benefit ratio to less resource consumption and minimized environmental impact. In this context, integrating considerations of wastewater and carbon emissions generated from economic activities to resource consumption leads to the realization of a green economy and sustainable development goals.

Contrary to the advantages offered by transformation adaptation, this approach encounters resistance from stakeholders due to the significant economic and social structural changes it introduces, particularly in regions where long-standing habits and dependencies on existing structures have developed. In contrast, reversible adaptation processes are more likely to gain social acceptance due to their minimal impact on existing structures. Consequently, for an effective climate change adaptation strategy within a risk management framework, it is advisable to implement both adaptation processes complementarily.

Given the interconnected nature of economic, social, and environmental subsystems and the inherent uncertainties in climate change adaptation outcomes, a comprehensive evaluation is imperative. Adopting a transdisciplinary approach through dynamic integrated models allows for a holistic assessment of these strategies. To aid decision-making and strategy selection, the use of robust decision-making tools, which consider current and future risks as well as stakeholders, is crucial.

The portfolio theory, renowned for its diversification feature, emerges as a fitting robust decision-making tool for risk management. By maximizing economic returns, minimizing risks, and adhering to the decoupling principle (maximizing return ratio to resource consumption), this theory allocates resources or capital strategically to a set of activities with high productivity, low risk, and less dependence on each other (reduction of system’s sensitivity). This, in turn, enhances adaptive capacity and reduces vulnerability. His theory can also be used to choose appropriate strategies based on the risk-taking of stakeholders. In this way, it becomes possible to reduce risk through conversion and reversibility processes. Ultimately, integration of the portfolio model with dynamic integrated evaluation models further enhances the potential for comprehensive risk management under changing climate conditions.

Conflict of interest

“The authors declare no conflict of interest.”

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