California Wineries and Climate Change: Extreme Weather Events, Resource-Supply Adaptation, and Wine Quality

Abstract

Current actions across countries to mitigate the impacts of climate change to the 2 °C outlined in international climate agreements are currently insufficient, indicating an increasingly important need to understand both the impacts of climate change as well as how to adapt to the inevitable changes. Firms are facing increasing changes to their surrounding natural environment which can impact performance. Nature adversity is a change to the natural environment that can have negative consequences for firm operations. Nature prosperity is a change to the natural environment that can have positive consequences for firm operations. Both nature adversity and nature prosperity can impact both firm performance as well as firm adaptation strategies for businesses that rely on agricultural products, including the California wine industry on which this dissertation is focused. Current research on the impacts of climate change on firm performance is still developing with business management research tending to focus on how environmental management initiatives affect environmental or firm performance rather than the direct impacts of climate on performance. Business management research tends to overlook the natural environment as an important component of the external environment that can impact the firm. While there is some work on the effects of climate change on industry-wide production and how extreme weather events affect firm investment and financial performance in the finance literature, there is still a need to understand how organization location and context affects our understanding of climate impacts.

In response to climate change impacts, firms may engage in resource-supply adaptation strategies, which consist of actions aimed at securing necessary firm inputs at a sufficient quantity and quality to ensure a firm’s product or service. Resource-supply adaptation can reduce firm exposure to extreme events, and longer term, planned responses can be essential to firm survival. Business management research on firm climate change adaptation is still developing, and there is a need to expand this area of research. Therefore, I ask: What impacts do extreme weather events have on firm product performance and resource-supply adaptation strategies? Further, business management research has outlined several important dimensions of extreme weather events such as frequency, duration, intensity, volatility, etc.. Research has rarely examined more than one dimension, and examination of multiple dimensions is needed in order to have a complete understanding of the impacts. I also ask: What different impacts do the dimensions of extreme weather events have on firm product performance and resource-supply adaptation strategies?

Using a dataset of 50,156 wine-winery-year observations for 535 wineries covering the years 1981-2019, I examine how extreme heat, cold, and precipitation events impact wine quality and winery adaptation strategies involving grape varietals and vineyard sources. I use a panel regression with firm, region, and year fixed effects when testing my hypotheses so as to test for the relationship between extreme weather events, winery resource-supply adaptation strategies, and wine quality. First, I find that extreme weather events can not only create adverse conditions for firms but can also create advantageous conditions where the firms can prosper. For example, I found that longer duration extreme heat events are related to higher wine prices. Second, some of my findings are both in support of and contradictory to prior research that has found an inverted U-shaped relationship between intensity and adaptation strategies (Rivera & Clement, 2019). For example, in support of prior research, I find an inverted U-shaped relationship between extreme cold event intensity and varietal adaptation strategies by wineries. However, in contradiction to prior research, I find a U-shaped relationship between extreme heat event intensity and varietal adaptation strategies. Further, I find that extreme precipitation event intensity is negatively related to vineyard adaptation strategies by wineries. Third, I find that more volatile extreme cold events result in less varietal adaptations by wineries. This finding is contradictory to prior research that found that higher ecological volatility was related to more slope expansion and snowmaking by ski resorts (Tashman & Rivera, 2016). While I did not find a significant effect for volatility affecting vineyard adaptations by wineries, I find that more volatile extreme cold events resulted in less varietal adaptations by wineries. I hypothesized that this was due to the increased uncertainty and unpredictability around more volatile extreme weather events which deter wineries from investing in costly and time-consuming resource-supply adaptation strategies such as varietal adaptation. Finally, I find that there is an adaptation gap which is a mismatch between adaptation responses by wineries and the adaptation needs of wineries. For example, I find that more frequent extreme heat events negatively impact wine prices. The most effective adaptation response to improve quality and increase wine price would be vineyard adaptation strategies. However, wineries are not engaging in more vineyard adaptations in response to these adverse impacts.

This research contributes to the following areas: 1) research on the impacts of climate change on firm performance, 2) the literature on firm climate change adaptation, and 3) the emerging literature on adaptation gaps. First, I contribute to research on how extreme weather events impact firm performance. Firm climate change adaptation research has primarily focused on how firms respond to adverse impacts through adaptation. However, I find that extreme weather events can lead to beneficial impacts that allow firms to prosper. Second, I contribute to the literature on firm climate change adaptation by examining how extreme weather events impact firm adaptation strategies. I examine firm longer-term, planned resource-supply adaptation strategies which can be essential to firm survival of extreme events and reducing overall risk for firms.

Third and finally, I identify the existence of an adaptation gap within a specific industry and across private businesses. While resource-supply adaptations are necessary for responding to extreme weather events to ensure firm resource supplies in the long-term, a firm may not actually engage in these strategies. There can be a mismatch between what decision makers within a firm should do, what they perceive as necessary, and what they are capable of to ensure resource supplies. This can lead to an adaptation gap where adaptation efforts do not match what adaptations are needed, and this can ultimately result in either insufficient or a complete lack of adaptation. Research into adaptation gaps is recent and limited to policy and applied on a very large scale (i.e., the national level). However, adaptation gaps can not only be integrated into policy, but adaptation gaps can be integrated into strategies by firms. This is important to consider since closing adaptation gaps may require both national policy as well as initiative by private industries and firms.