Greener economy good for small business and climate change
Products and services from environmental adaptation are feasible with incentives and support for entrepreneurs
Climate change is viewed as a pressing challenge facing society in the 21st century, posing real risks to economies, societies and the environment. The recent increased incidence of adverse climate-related disasters, such as the droughts in the Western Cape and floods in Durban, has highlighted the urgency for adaptation.
While risks exist, there are potential opportunities for small businesses if SA is proactive in adapting to the effects. Adaptation to climate change opens opportunities for innovation, especially for small, medium and micro-sized enterprises (SMMEs), and particularly for those on the smaller end of the spectrum.
A report released by economic policy research institute Trade & Industrial Policy Strategies (Tips) highlights that seizing such opportunities requires both stimulating demand for adaptation-related solutions and setting up a conducive policy and regulatory framework, notably by supporting entrepreneurs.
So what are these products and services that could emerge from climate change adaptation? They include solutions delivering rapid returns on investment; solutions protecting against possible climate change risks (but not bringing short-term financial benefits); financial risk transfer products; and solutions enhancing the consumer experience.
The first category of solutions delivers a rapid return on investment (returns that lead to a short and relatively certain payback period) and is mostly implemented in an anticipatory fashion as a result of their financial attractiveness. Often these solutions have mitigation co-benefits as they lead to resource efficiency and savings, in turn reducing greenhouse gas emissions.
While providing financial benefits to customers, these solutions often require large upfront investment. Without support, these are therefore mostly attractive to large businesses and high-income households. Examples include water-leak detection and repair, energy-efficient appliances and lighting, and water-efficient crops. For instance, Stellenbosch-based MySmartFarm seeks to provide data-rich, internet-connected solutions to foster sustainable farming activities.
The second category of solutions protects against possible climate change risks and builds resilience, but does not necessarily bring short-term financial benefits. Implementation is likely to be triggered (rather than voluntary), although voluntary implementation can occur when consumers have good predictions of future events or are highly risk-averse. Examples of activities include infrastructure climate-proofing (such as the raising of dam walls), alternative water supply options and crop diversification and optimisation. Hydroponic farmers AB Farms, based in the West Rand, are one company leading the way to resource-efficient farming in SA.
The third category of solutions relates to financial risk transfer products. These products transfer risk rather than directly protect against it. Just as one might insure their personal property or vehicle, this risk transfer provides insurance against future climate risks and the harm they incur on businesses. A third party, such as an insurer, provides cover against these risks. Examples of these products include climate risk assessments and parametric insurance, which triggers pay-outs based on the value of an established metric such as the levels of a dam or agricultural production.
Such products are a direct cost and bring no certain financial benefits but insure against possible hazards, therefore providing financial security in the event of an adverse climatic event. Their uptake depends on the consumer’s risk perception and the availability of such products. Interesting avenues are accessible to entrepreneurs by developing competencies in digital and data skills, financial innovation and climate-risk forecasts which are currently prized by insurers. The development of climate microfinance products is another route, as well as small businesses operating specialised brokerage services.
The last category of solutions focuses on enhancing the consumer experience. These solutions would be sold on providing an aspirational experience or protecting an existing lifestyle. Examples include eco-friendly furniture, foods and cleaning agents, recyclable coffee pods and luxury eco-lighting. For example, Cape Town-based startup Isidima provides next-generation sanitation solutions using limited water and beneficiating the system’s waste.
Demand for such “frontier” solutions remains limited as it is mainly driven by early adopters, trendsetters and pioneers motivated by personal rather than financial motives. Small businesses targeting this market should focus on developing specialised products for distribution through specific channels. Products should aim to bolster both the aspirational nature of the good combined with the climate benefits. This can be enhanced through social media and partnerships with retailers as well as influencers.
On the supply side, access to finance, infrastructure and markets should be supported by dedicated programmes focused on entrepreneurs active in greening the economy.
On the demand side, significant action is required. Finalising the country’s adaptation strategy and mainstreaming it through the organs of the state; raising awareness across society; utilising public procurement, regulations, enabling policies and, in some cases, tax incentives can be used as instruments to drive demand. Dedicated support for vulnerable groups, such as small businesses and low-income households, are particularly required to foster their adaptation.
In the end, adapting to climate change is an urgent necessity. Whether or not it comes with domestic co-benefits for small business development, however, relies on adequate support and action.
• Montmasson-Clair is a senior economist at Tips