Unsustainable and sustainable adaptation

In attempting to adapt to changing business environments brought about through climate shocks, MSMEs can try make sustainable, or unsustainable adaptations. MSMEs apply sustainable adaptations if their conditions provide opportunities for business preservation in disaster situations, and if not, MSMEs adapt non-sustainable strategies. Increased frequency and severity of natural disaster linked to climate change for example, reduces the potential for sustainable adaptation.280

The challenges to MSME sustainability include the ability to deal with economic and social change, engage in responsible and ethical business practices, efficient use of natural resources and protecting the environment, provide high-quality products and services, and develop metrics to determine if the company is meeting stakeholder needs. An MSME’s business model should be developed with economic, social, and environmental principles collectively in mind to mitigate possible negative conflicts to business viability amongst the three. Sustainable development as termed by the United Nations highlights calls on firms to develop long-term economic, social, and environmental principles simultaneously. Therefore, for firms to pursue sustainable development, they should incorporate economic prosperity, societal wellbeing, and environmental protection in their products, policies, and practices accordingly.

Any business today has to deal with complex, competitive, challenging, and unpredictable conditions. According to Charles Darwin’s Origin of Species, “it is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself”. It is essential to make strategies to cope with such challenges by applying this theoretical perspective to the business environment. The inherent flexibility and adaptability of the small business will put it at the forefront of economic transformation and make it a central focus of economic policy.

Financial barriers are a key reason why firms resort to unsustainable adaptation. The willingness and capability of MSMEs to adopt sustainable practices and seize upon green business opportunities generally hinge on size-related resource constraints, skill deficit and knowledge limitations. Humans are able to thrive in a wide range of climate conditions, but it has been found that climatic factors, and climate extremes can have a strong bearing on economic performance.281 In the face of such, the primary motive of business may be to keep down costs, minimize disruptions or increase sales. The way the relevant decisions are taken is influenced by a range of additional factors. In Malaysia, for example, 17 per cent of the total environmental protection expenditure is incurred by MSMEs. Inadequate waste disposal by MSMEs contributes to increased pollution by hazardous materials and greenhouse gases.282 The importance which MSMEs assign to climate resilience is influenced by business strategies, management priorities, risk perceptions, and policy that promotes greening of business. In sectors such as agriculture, water, insurance and consulting there is evidence that larger firms are beginning to recognize effective climate risk management as a source of competitive strength.283

Reducing the environmental impact of MSMEs in both manufacturing and services is critical in greening the economy. Improving the environmental performance is also a significant business opportunity for MSMEs themselves as important suppliers of goods and services. MSMEs are often unaware of many financially attractive opportunities for environmental improvement. Even when they are aware of the potential of better environmental performance to improve a firm’s competitiveness, a lack of appropriate skills and expertise commonly prevents firms from acting upon win-win opportunities.284 At the same time, the lack of resources often leads to MSMEs being risk-averse and less willing to invest in new technologies, partly because of the uncertainly about the payback period.

As noted in Part I of this Guide, SDG 13 stipulates an array of targets that focus on improvements in climate-related resilience and adaptive capacity. In this context, scientific evidence supports that climate change impacts are pivotal challenges for sustainable development. At the same time, these businesses are well positioned to develop and sell products and services that strengthen the resilience of vulnerable communities. MSMEs play a vital role in community livelihoods and resilience but they tend to have fewer resources to adapt to climate change than do larger enterprises. They have limited capacity to assess risks and take advantage of opportunities associated with climate change. Given these challenges, there is considerable scope to increase the contribution that MSMEs can make to adaptation. With public sector assistance, MSMEs could be incentivized to catalyze investment in risk management and resilience, and thereby become the most direct means of supporting vulnerable communities as they adapt to climate impacts.

Assistance for MSMEs adapting to climate change is available from international entities such as the UNDP. The UNDP’s website for MSMEs seeking to adapt to climate change may be useful in this regard. From a policy perspective, the International Institute for Sustainable Development shares methods for engaging small businesses in climate change adaptation.

Resources

280 Crick, F., Eskander, S., Fankhauser, S. and Diop, M. (2018) ‘How do African SMEs respond to climate risks? Evidence from Kenya and Senegal.’, World Development, 108, pp. 157–168.

281 M. Dell, B.F. Jones, B.A. Olken (2012). Temperature shocks and economic growth: Evidence from the last half century. American Economic Journal: Macroeconomics, 4 (3) (2012), pp. 66-95

282 Auwal, A. M.; Mohamed, Z.; Shamsudin, M. N.; Sharifuddin. J.; Ali, F. (2018). External Pressure Influence on Entrepreneurship Performances of SMEs: A Case Study of Malaysian Herbal Industry. Journal of Small Business and Entrepreneurship, 1-22. DOI: 10.1080/08276331.2018.1509504.

283 S. Surminski (2013). Private-sector adaptation to climate risk. Nature Climate Change, 3 (11) . pp. 943-945

284 OECD 2021, Facilitating the green transition for ASEAN SMEs: A toolkit for policymakers