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Adapting to Climate Change: The Private Sector’s Role

This is the first installment of WRI’s new blog series, Adaptation and the Private Sector. Each post will explore ways to engage the private sector in helping vulnerable communities adapt to the impacts of climate change.

Adapting to the impacts of climate change—like heat waves, increased floods, and natural disasters—is an enormous challenge. It’s also one that comes with an enormous price tag. Although it’s difficult to calculate the extent of the costs, the World Bank estimates that developing countries need $70 to $100 billion USD per year through 2050 to meet their current and future climate adaptation needs.

The Climate Policy Initiative, however, estimates that in 2011, only $4.4 billion USD in adaptation finance went to developing countries. This leaves a gap of anywhere from $65.6 to $95.6 billion USD per year between what developing countries need and what developed nations are giving.

So who can help fill this gap?

The private sector may be the answer to this question. Already, proactive private companies are beginning to address climate change in their investments and business planning. With a little work on the part of the public sector, the private sector may be inclined to invest more in adaptation—to reduce their own risks, as well as those of vulnerable populations. Our new five-part blog series, Adaptation and the Private Sector, will outline some of the roles the private sector should play and the ways to support their contributions to climate change adaptation.

But first, it’s important to understand the progress that’s already being made and the challenges that exist.

How Is the Private Sector Responding to the Impacts of Climate Change?

While corporations and businesses have reacted to international and domestic pressures to curb their CO2 emissions and invest in mitigation, they have been less engaged in building climate-resilient communities. They have little incentive to invest in an area that’s largely seen as a public good. If you look closely, however, you see that they are starting to make some progress.

First, the private sector is engaged in adaptation; their goods and services are just not labeled as such. Businesses and individuals have a desire to protect their assets and livelihoods from climate change and are willing, if finances are available, to spend money on goods and services that provide this protection. Because demand is there, businesses will respond with new products. These products, however, aren’t marketed as “climate-resilient” and don’t come with an “adaptation-friendly” sticker. For example, buildings with a rooftop garden are marketed as green buildings or energy-saving strategies, yet they also provide adaptation benefits in the form of alleviating heat island effect.

Second, most private sector action on climate change has gone to “climate-proofing” operations. Companies are relocating buildings to low-risk areas, purchasing weather insurance, and reducing water and energy usage—which are all good practices that protect them against climate hazards. In some instances, such activities may even help vulnerable populations, as is the case when corporations climate-proof their supply chains. For global companies, suppliers can be small-holder farmers, miners, or artisans in developing countries. These suppliers can build their adaptive capacity when corporations make their own supply chains more resilient, such as giving farmers access to drought-resistant seeds. The public sector should look to support and encourage further action in this area.

Challenges to the Private Sector

The private sector also faces a variety of challenges when dealing with climate change impacts. Addressing some of these challenges could go a long way toward creating a better enabling environment for the private sector.

First, businesses need better, more actionable information on climate change and its projected impacts. Levels of long-term uncertainty are difficult to take into account when making short-term investment decisions. For example, a survey of 72 businesses found that most respondents thought climate change information was hard to incorporate into their business plans because of uncertainty about the magnitude, timescale, and precise location of climate impacts. Furthermore, scientific information about the climate system is difficult to decipher for many audiences, which compounds the challenge of making informed decisions on how to best respond. Businesses, therefore, need information from public and academic sources that help them make informed decisions on dealing with climate change impacts.

Second, while more and more corporations are investing in making their operations more climate-resilient, few small and medium enterprises (SMEs) are able to do so, due to lack of resources. They are unlikely to have in-house experts on climate change and sustainability, and their funds to bring in outside consultants are limited. SMEs, therefore, are less prepared for climate impacts and more likely to suffer from them. Furthermore, SMEs in developing countries often do not have key types of affordable financial products—such as loans and insurance—available to them. This lack of financial and technical resources makes it difficult for SMEs to invest in adaptation planning.

This is by no means an exhaustive list—the challenges to scaling up adaptation finance are numerous and complex. But by understanding these key limiting factors and acknowledging the current actions the privates sector is taking, we can already start to see ways that governments and the international community can support, encourage, and scale-up private sector adaptation actions and investments. Understanding the obstacles can help the public sector engage the private sector in making vulnerable communities more climate-resilient.

Our ongoing blog series, Adaptation and the Private Sector will explore various ways to support and scale up private sector investments in climate change adaptation. Check back for the next installment, which will look specifically at the role multinational corporations can play in building more climate-resilient societies.

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