Private Sector & Adaptation

Dealing with risks and seizing &
financing opportunities in
the private sector

The private sector must respond to climate-related economical risks and seize business opportunities to safeguard operations, to strategically create sustainable growth and to increase societal resilience.

The private sector can respond to current and projected climate change induced impacts by

  • adapting the private sector itself by climate-proofing value chains and operations to safeguard business continuity;
  • financing and investing in adaptation solutions,
  • providing adaptation solutions, i.e. by providing products, services, and technologies that increase the resilience.

www.climatepolicyinitiative.org/unlocking-private-sector-adaptation-finance/

Role 2 and 3 can also be interpreted as seizing business (and investment) opportunities in climate change adaptation. The following sections explain these roles in more detail.

Context

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.

How is the private sector impacted by climate change?

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.

What are the challenges of the private sector to adapt to climate change?

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.

How can the private sector adapt to climate change?

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.

Examples for adaptation measures to minimize risks include:

  • Installation of power backup for uninterrupted power supply in the case of interruption due to storms
  • Usage of water saving technologies in order to cope with water shortages
  • Installation of weather proofed storage spaces for protecting valuables against extreme weather events
  • Provide housing for employees on the company premises to ensure that they can reach the company even during heavy rains or extreme heat
  • Diversify suppliers to reduce price hikes and transport interruptions during extreme weather
  • Assess whether and how to invest in solar panels for independent energy generation

How can the private sector be supported in adapting to climate change?

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.

Context

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.  

What are the challenges of mobilizing investment in private sector solutions for climate change adaptation?

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.

How can investments into adaptation solutions be accelerated/supported?

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.

Context

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

  • An Indian company has developed a drip irrigation system which adapts to growing uncertainty around water availability by reducing the water requirement.
  • In order to cope with high temperatures a chemical company developed a new color which minimizes the thermal effects of sunlight absorption on walls by reflecting thermal radiation.
  • A business in Bangladesh is working on climate proof shipping. It builds fiberglass fishing boats which are more stable in turbulent weather conditions and significantly more resilient in flood conditions.
  • A Canadian SME developed solar photovoltaic and wind powered portable and fixed structure greenhouses. These eco-friendly and self-sufficient greenhouses are capable of growing organic crops in a range of climatic conditions.

What are the co-benefits of adaptation solutions?

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.