Private Sector Adaptation
Private Sector Adaptation "at a glance"
Climate change has severe effects on the private sector, especially on small and medium-sized companies (SMEs). 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. Adverse impacts of climate change can hamper and even interrupt business operations, threatening the bottom line – and ultimately, business continuity, jobs, and economic growth. In addition the private sector plays an important role for making societies more resilient towards climate change impacts: for example, by ensuring continuity in delivering products and services, by offering climate sensible products and by contributing to necessary investments for climate change adaptation, e.g., in infrastructure or in new markets. From a business perspective, climate change on the one hand poses risks to the company but on the other hand can also present opportunities. Dealing with those risks and seizing the opportunities – which managers of companies are mostly well experienced in – are strategies to create business continuity and growth and thus contributes to an increase societal resilience.
Businesses are affected by impacts of climate phenomena like e.g. increasing temperatures, unpredictable and extreme weather events, longer droughts, heavier rainy seasons and others. Vulnerability to climate phenomena varies between sectors and enterprises; it is determined by their exposure to climate phenomena, their vulnerability e.g., specific characteristics such as use of energy and water, and their respective adaptive capacity. Companies can be affected by direct or indirect risks on different impact areas from climate change phenomena.
Direct risks include building and machine damage, storage problems or a decrease of labor productivity.
Indirect risks lie outside 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. By improving adaptive capacity and by implementing adaptation measures, vulnerability to climate change phenomena and the related negative effects on businesses can be reduced. As businesses know how to manage risks they need to develop a deep understanding that they have to include the risks caused by climate change into their risk management strategies.
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. Equally, a sketchy energy supply due to insufficient infrastructure may become even less reliant in hot summers.
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. Managing climate risks thus should be considered within companies’ risk management. 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 impacts 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 for an uncertain event or gradual change in future. Not only companies are 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 approaches that can serve 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. Common impacts include the company’s 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.