adelphi, 2019. The roles of the private sector in climate change adaptation – an introduction. Available at: https://www.adelphi.de/en/publication/roles-private-sector-climate-change-adaptation-introduction
Climate change has severe effects on the private sector. It is estimated that climate change could add over USD 100 billion of loss each year to the global economy, factoring in indirect costs from supply chain disruption and other knock-on economic consequences4. The first role of the private sector is thus to adapt its own assets, operations, supply chains, and resources to the impacts of climate change to ensure business continuity and sustainable economic growth.
Rising sea levels, temperatures, and more frequent extreme weather events, such as droughts, floods and wildfires and other climate change impacts threat business assets, supply chains and operations more and more frequently. Climate-induced risks vary between sectors and are determined by an enterprise’s direct exposure to those hazards on the one hand and its vulnerability, defined by its dependency on resources such as energy or water, on the other hand.
The private sector constitutes various actors who employ individuals, ranging from large multinational enterprises to individual business owners and other non-governmental agencies, who regardless of their size and sector need to adapt to the widely felt impacts of climate change, albeit to different degrees and timelines depending on their respective vulnerabilities to direct and indirect climate-induced risks. A company’s size and financial resources are important factors determining their capacity to adapt to climate change. Besides limited resources that hinder investments in adaptation measures addressing extreme weather and slow onset events, a lack of awareness of climate and disaster risks and limited available solutions are further challenges toward internal private sector adaptation.
Private sector adaptation to climate change aims to minimize climate-induced risks in order to increase the resilience of businesses and to avoid potential future costs. Managing climate risks thus should be embedded into corporate risk management. By improving their adaptive capacity and by implementing adaptation measures, vulnerability to climate-induced risks and related negative effects on businesses can be reduced.
Companies will first focus on adaptation within their direct sphere of influence. This can include measures to improve company buildings and infrastructure, the production process, the situation of employees or the storage of supplies and produced goods. Collaboration on adaptation with external stakeholders, such as suppliers, buyers, governmental authorities or the financing community is more challenging.
Which adaptation measures a company chooses depends on the climate change impacts and risks it faces. These are dependent on the company’s location, sector, technology level, and adaptive capacity. Deciding factors include investment costs for measures, the type of risk covered, the comprehensiveness of the measure and whether there are (positive or negative) side effects to be expected – thus, ultimately, the costs and benefits of measures.
See the Climate Expert Website for case studies from Bangladesh, Costa Rica, Morocco, Nicaragua and Rwanda
Examples for adaptation measures to minimize risks include:
Climate change adaptation requires a thorough understanding of the potential impacts of climate change and how buildings, operations, (human) resources and the overall strategy of a company are likely to be affected. There are different approaches that can serve companies to assess those risks. Tools usually encompass an assessment of the exposure to climate-related risk as well as an assessment of each potential climate hazard’s impact on the company in order to identify and prioritize possible adaptation measures. By defining several standard impact areas to be analyzed by these tools, such as the company’s buildings, its processes, its logistics and stock, employees, the regulatory framework, access to finance and market demand, these assessments can be implemented in a structured way for each company. Cost-benefit tools or similar decision-making instruments can further support the company’s decision on the most beneficial adaptation measures. Visit our Webpage Climate Risk Assessment & Management for more details.
The second key role of the private sector is to mobilize investments into adaptation solutions, such as innovative technologies, products and services as well as projects and other measures to close the adaptation finance gap and accelerate existing solutions to respond to current and oncoming climate risks.
A major challenge toward mobilizing investment into private sector solutions for climate change adaptation is that adaptation business models can often not be identified by capital providers due to both insufficient communication and awareness of the adaptation relevance from solution providers as well as lack of standardized impact measurements of adaptation solutions. Indeed, metrices to measure and thus compare adaptation impact are not yet developed, mainly due to the geographical dependency and wide variation of adaptation solutions. Whilst mitigation business models can be measured through the quantifiable metrics ‘CO2 emissions/ton reduced’, adaptation solutions take all kinds of different forms and shapes.
The specific challenges linked to mobilizing private sector finance for adaptation projects, such as a lack of information on profitable investment opportunities, adaptation hypothesis and impact measurement, requires dedicated technical assistance for both the finance demand and supply side. Scaling adaptation solutions not only requires redirecting financial flows but must mobilize additional capital and investments. Next to governmental financial incentives, the private sector can be engaged to invest in adaptation solutions through targeted technical assistance measures to strengthen capacities to identify, scale and finance adaptation investment opportunities where the business case is often less visible than in mitigation solutions. Furthermore, expertise and knowledge of local climate data, projections and contexts complements the often too narrow financial lens focused on monetary returns, revenues, and profit, by translating climate impacts into business opportunities.
The third role of the private sector refers to providing new and scaling existing adaptation solutions. The demand for innovative technologies, services, and products that support climate change adaptation is growing rapidly.
Examples for exploiting business opportunities
Climate change induced environmental degradation often results in a trickle-down-effect that influences resource availability, food security, and other existential factors safeguarding the well-being of societies. Due to this intimate tie between climate change impacts and social factors, solutions that help vulnerable populations to adapt often exhibit mitigation and societal co-benefits. For example, improved irrigation services not only help small-scale farmers adapt to increasingly scarce water resources due to longer periods of drought, but also safeguard farmer’s income and improve food security. Similarly, water filters not only help individuals adapt to increasingly unclean water that pose health risks to their consumers but reduce the need to boil the water on gas stoves or charcoal, thereby offering mitigation co-benefits. These cross-functional advantages highlight the importance of scaling adaptation solutions and mobilizing investments to fill the adaptation finance gap.