Alongside communities and ecosystems, climate-related impacts in the private sector are of major societal concern since economic sectors often form the backbones of society. The thorough evaluation of risks and opportunities and the prioritisation of measures help to develop adequate adaptation strategies, increasing both business activity and societal resilience.
Climate change has severe effects on the private sector, especially on small and medium-sized companies (SMEs). 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 consequences. Resource- and labor-intensive manufacturing sectors often form the backbone of the economies in developing and transitioning countries and these sectors are also particularly vulnerable to climate change impacts. These adverse impacts can hamper and even interrupt business operations, threatening the bottom line and, ultimately, business continuity, jobs, and economic growth.
At the same time, 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-sensitive products and by contributing to necessary investments for climate change adaptation, e.g. in infrastructure or new markets. From a business perspective, climate change therefore does not only pose risks to corporate development but addressing it can also provide multiple opportunities. Dealing with those risks and seizing the opportunities are strategies to ensure business continuity and create growth. Especially in the face of recent implications due to the COVID-19 pandemic, establishing a firm footing for long-term innovations and climate-friendly economies will increase much needed societal resilience.
Businesses are increasingly affected by climate hazards such as unpredictable and extreme weather events, rising temperatures, longer droughts and heavier rainy seasons. Meanwhile, climate-induced risk varies between sectors and enterprises and is determined by their exposure to those climate hazards on the one hand and their vulnerability, defined by their dependency on resources such as energy or water, on the other.
Companies can be affected by direct or indirect risks due to climate hazards. 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 their adaptive capacity and by implementing adaptation measures, vulnerability to climate-induced risks and related negative effects on businesses can be reduced. As businesses have developed tools to address general risk, they furthermore need to acknowledge the presence of climate-induced risk and include them in their risk management portfolio.
It is important to note that climate change impacts do not only 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, insecure energy supply due to insufficient infrastructure may become even less reliable in hot summers.
On the one hand, 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 their corporate risk management. On the other hand, businesses can consider climate change impacts to exploit new business opportunities. By studying the needs for new products and services which foster climate-resilience and facilitate adaptation, and/or by anticipating changing customer preferences and regulatory frameworks due to climate change, companies could identify new market opportunities granting them a first-mover advantage over competitors.
The spatial and temporal occurrence of climate-induced impacts remains uncertain, whereas companies seek predictability to develop their business strategies and investments. Therefore, it is oftentimes difficult for companies, especially for SMEs with limited resources, to invest in adaptation measures to address uncertain events or gradual change in the future. In addition, lack of awareness of climate and disaster risks for businesses as well as of suitable solutions are further barriers to undertake adaptation measures. Finally, given that many adaptation measures do not have a demonstrable return on investment but rather limit costs in the future, they may face difficulties securing funding.
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 a number of standard impact areas to be analysed by those tools, such as for example the company’s buildings, its processes, its logistics and stock, employees, the regulatory framework, access to finance and market demand, these assessments can moreover be implemented in a more 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.