As the macro economy shifts to respond to climate change and is buffeted by pandemics, small and medium-sized enterprises are forced to adapt and become more sustainable or face failing. Those in developing countries are especially vulnerable.
It is becoming all too clear that a warming world is not simply a gradual process with a few additional milder days in winter, and longer summer seasons. The differential heating of the planet – much greater at the poles – has led to changes to the jet stream and to ocean currents with resulting increases in intense precipitation and storms punctuated by longer and more intense droughts and fires.
These erratic weather patterns are posing major challenges to small businesses, especially those in agriculture. They must change their operating model to become more resilient and reduce climate altering emissions.
Governments are finally mobilizing to address climate issues. Their sometimes mixed and changing messages – or the absence of policies – can create regulatory risk for companies. Governments must convey their policy intentions clearly so that small business managers can avoid making investments or embarking on ventures that run counter to future government measures.
Incentives work best
As a lead author of five major Intergovernmental Panel on Climate Change Reports, I have evaluated technologies and strategies to promote resiliency and address growing climate challenges. Incentives have proven more effective than penalties to encourage the needed transformations. Policies to discourage use of fossil fuels, such as price hikes, should be accompanied by compensation to assist SMEs and others to switch rapidly to new, cleaner forms of energy and prevent the often-violent opposition to such measures.
For example, Norway is fostering use of electric vehicles by eliminating its high vehicle purchase tax, establishing rapid charging stations, reducing tolls and providing dedicated parking. Norwegians are far ahead in replacing petroleum-powered vehicles, even though much of the country’s wealth comes from oil and gas production. Less affluent countries such as Nepal have accelerated the shift to electric ‘motorized rickshaws’ by making them easier to purchase and operate.
While smaller firms may be more vulnerable to changing weather patterns and regulatory risks, many have been at the forefront of innovation. In Europe and North America, organic agriculture began at small scale and is now the fastest growing sector of food production. In Niger, an innovative agroforestry farming method that responded to increasing temperatures and erratic rainfall was developed locally and transmitted from village to village. It now serves several million people.
While not every small start-up in the back room of someone’s home will become a technological giant, most large firms began as a small enterprise.
The key challenges for small businesses to become resilient to climate change are threefold:
- Building capacity, which includes the ability to modify dysfunctional business models or accept new technologies;
- Finding and accessing financial resources;
- Responding to changing external market conditions.
Small businesses as innovators
Building capacity in developing countries to replace expensive diesel generators and their fuel with less expensive solar panels and batteries avoids the need to build large, expensive electric grids to bring power to homes and businesses. It also creates self-reliant communities, improves overall well-being and provides new opportunities for small businesses.
When lack of electricity in Africa’s rural areas made mobile phone charging difficult, for example, enterprising village women borrowed money to buy a solar panel and phone charger. In Tilonia, Rajasthan, the Barefoot College has trained thousands of poor village women to be ‘solar engineers’ who have brought solar panels, lanterns and ovens to rural India and several African countries. They also service and maintain these systems.
Creating these innovators entails overcoming the financial limits that traditionally hamper adaptation by small businesses. The microfinancing pioneered at scale by the Grameen Bank in Bangladesh and its imitators has underwritten a revolution in climate adapted small enterprises. Women now produce marketable goods and have gained a higher status in their communities.
Once small business-based economies are secure and resilient, they move beyond basic needs and begin to make marketable goods for local markets and eventually for export. This is already happening, with fair trade organizations purchasing food items and handicrafts from small businesses and marketing them internationally.
This article has been drawn from the International Trade Centre’s flagship report, SME Competitiveness Outlook 2021.