At a GlanceWhy does the private sector need to adapt to climate change?
Climate change impacts severely affect the private sector, especially small and medium-sized companies. All sectors are affected, but particularly resource- and labor-intensive manufacturing sectors are vulnerable to climate change impacts – these are oftentimes the backbone of the economy in developing and transitioning countries. Impacts can hamper and even interrupt business operations, threatening the bottom line – and ultimately, business continuity, jobs, and economic growth. In addition, while its role in mitigation of greenhouse gases is clear, the private sector plays an important role for making societies globally more resilient towards climate change impacts: for example, by ensuring continued product and service availability, by offering climate sensible products and by contributing to necessary investments for climate change adaptation, e.g., in infrastructure or in new markets. Therefore, private sector actors need to act now, dealing with current and future impacts of climate change for their own survival and to increase societal resilience.
Businesses are affected by increasing temperatures, unpredictable and extreme weather events, longer droughts, heavier rain seasons and other climate change phenomena. Climate vulnerability varies between sectors and enterprises; it is determined by their exposure to climate phenomena, their sensitivity, e.g., specific characteristics such as use of energy and water, and their respective adaptive capacity. By improving adaptive capacity, vulnerability to climate change impacts can be reduced. Companies can be directly affected by climate change through building and machine damage, storage problems or a decrease of labor productivity. Indirect impacts on the other hand lie outside of the direct sphere of influence of businesses, and include shortages in resources such as water and energy, disruptions of supply chains, changes in regulations, and changes in demand. In this regard, businesses not only need to ensure that their business operations are secure from direct and indirect impacts, but also need to climate-proof their products and services. It is important to note that climate change impacts do not necessarily pose new threats, but can also aggravate existing stress factors. For example, a falling water table due to extensive use of groundwater may be further exacerbated by extended dry periods and a sketchy energy supply due to insufficient infrastructure becomes even less reliant in hot summers.
Climate change impacts should be considered within companies’ risk management; specific approaches are therefore required.
On the one hand, adaptation to climate change for the private sector aims to minimize climate-induced risks thereby increasing their resilience and avoiding potential future costs. On the other hand, businesses can consider climate change impacts to exploit new business opportunities. Studying needs for new products and services which are climate-resilient or facilitate adaptation and/or anticipating changing customer preferences and regulatory frameworks due to climate change can identify new market opportunities for companies and lead to a first-mover advantage over competitors.
Climate change is causing uncertainty where and when its impact will occur whereas companies seek predictability to develop their business strategies and investments. Therefore, it is oftentimes difficult for companies, and specifically for SMEs with their limited resources, to invest in adaptation measures now for an uncertain event or gradual change in future. Not only are companies directly affected by climate change, high dependencies within supply chains increase companies’ vulnerability even further. In addition, lack of awareness of climate and disaster risks for the business as well as suitable solutions are further barriers to undertake adaptation measures. Also, as many adaptation measures do not have a demonstrable return on investment, but rather limit costs in the future, there is a lack of financial products available for businesses.
Climate change adaptation requires a thorough understanding of the potential impacts of climate change and how a company’s buildings, operations, and overall strategy are likely to be affected. There are different tools that can help companies to assess their climate risks (resulting from the potential impact and the likelihood of an event). Tools usually encompass an assessment of the exposure to climate phenomena, as well as an assessment of each phenomenon’s impact on the company. To do this in a structured way, it is helpful to define impact areas that are then assessed for each company. Sample impact areas include the company buildings, its processes, its logistics and stock, employees, the regulatory framework, access to finance and market demand. The assessment of business risks and opportunities in these impact areas enables companies to identify and prioritize possible adaptation measures. Cost-benefit tools or similar decision-making instruments can further support the company’s decision on the most beneficial adaptation measures.