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Micro, Small, and Medium Enterprises: Key Players in Climate Adaptation

This is the third installment of WRI’s blog series, Adaptation and the Private Sector. Each post explores ways to engage the private sector in helping vulnerable communities adapt to the impacts of climate change. The work behind these pieces has been done to inform the day-long conference Climate Finance and the Private Sector: Investing in New Opportunities, co-hosted by WRI and the Korean government in Songdo, the Republic of Korea on December 5, 2013. The next installment in this series will look at how governments can engage the private sector in building more climate-resilient societies.

In most developing economies, Micro, Small, and Medium Enterprises (MSMEs) employ up to 78 percent of the population and account for approximately 29 percent of the national GDP. Their presence in communities throughout the world– big and small, rural and urban – allows them to get products and services to hard-to-reach populations. This market concentration and high level of employment means MSMEs are in a good position to contribute to making vulnerable populations more climate-resilient.

But while MSMEs can assist in helping vulnerable households adapt to climate change, they are also extremely vulnerable to the impacts of a warmer world, such as intensification of precipitation and shifts in water availability. It’s important that MSMEs overcome these challenges and capitalize on their unique business opportunities in ways that help vulnerable communities adapt to climate change.

Climate Challenges for MSMEs

In general, MSMEs in developing countries face multiple challenges when trying to grow or develop operations. One of the main obstacles is limited access to financial resources in the form of loans, credit, or grants. MSMEs in developing countries face a $2.1 to $2.6 trillion gap in financing, meaning roughly 200 to 245 million formal and informal MSMEs in low-income countries cannot get access to the funds they need. Without this finance, MSMEs are limited in their ability to develop new products and expand operations. MSMEs also face other development challenges, including low human resource capabilities, low technological capabilities, and insufficient access to electricity.

All of these challenges make it difficult for MSMEs to adapt to the effects of climate change, such as floods, droughts, and sea level rise. For example, a shop owner who cannot get a loan to purchase structurally sound retail space may see her inventory washed away during flash floods. An animal breeder who doesn’t have a phone or radio to receive weather forecasts may lose his herd because he is unaware of an impending drought and is unable to get his herd to deep-water drinking holes in time.

MSMEs’ vulnerability to climate change is compounded by the fact that many operate outside the formal sector. In the case of sub-Saharan Africa, for example, the informal sector employs roughly 80 percent of the labor force. These businesses will have limited access to public social safety nets, formal finance channels, and post-disaster insurance—making it difficult for them to recover quickly from a storm or other extreme weather and climate events.

Climate Change Opportunities for MSMEs

Although MSMEs are themselves vulnerable to climate change, they still have important roles to play in building community resilience.

First, they can develop climate-resilient goods and services that are affordable to vulnerable populations. MSMEs are closely integrated into their communities, and as a result, have local knowledge of consumer demand and supply. This level of understanding can help MSMEs identify areas of need and respond accordingly. This may be especially useful for adaptation, since climate change impacts vary depending on where place-specific climatic, environmental, and socio-economic factors intersect. Here are a few examples of MSME activities that build climate resilience in local communities:

  • KarmSolar Solutions in Egypt, where water scarcity is an increasingly pressing issue, designs solar-powered desalination systems for households and small businesses.

  • Waterlife produces clean, affordable drinking water for households in India that have problems with water contamination from flooding.

  • In Singapore, Green Future Solutions consults MSMEs on climate change adaptation techniques.

  • Entrepreneurs in the informal settlements of Dakar, Senegal are selling garbage and sand to households that want to heighten the base of their houses to adapt to frequent flooding.

  • An entrepreneur in Brazil designs solar lights from water bottles, a low-cost, climate-friendly lighting option.

As these examples show, climate change can present an opening for entrepreneurs to develop new products and create new businesses. These products not only build climate resilience, they are affordable to low-income households.

Second, MSMEs can upgrade their current products. In general, small and medium firms don’t have the same bureaucracies as larger corporations, allowing them to adapt their products more rapidly to changes in the climate. For example, a street vendor or restaurant owner may start incorporating more drought-resistant cassava dishes into menus. Small bars and taverns may experiment with grains that grow well under increasingly dry conditions, like pearl millet, for their home brews. Businesses providing pit-latrines in urban areas are making the holes deeper and building the seats higher to prevent water contamination from increased flooding.

Third, MSMEs can directly engage with community members to build adaptive practices. Studies from Sri Lanka, South Africa, and Vietnam show that MSMEs are concerned with cultivating positive community relationships. In this sense, MSMEs can also have a social ‘license to operate’ when it comes to adaptation. For example, MSMEs can educate households on actions they can take and items they can purchase to increase their resilience to extreme weather and climate events.

All of these actions can go a long way toward helping communities prepare for current and future climate change risks. However, challenges remain to ensure that MSMEs can withstand climate risks themselves. National and international decision-makers must recognize the important role that MSMEs can play in building more climate-resilient societies and help unlock their potential through effective policies and practices. Indeed, strengthening the role that MSMEs play in climate adaptation can help build more resilient, secure communities.

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