How ERM Can Assist MSMEs In Reducing Climate Change Risks

Using ERM helps MSMEs gain economic and financial insight to develop risk-based mitigation strategies, as well as in developing risk assessments and response plans

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Climate change is a large, complex and evolving subject. Broadly, it refers to long-lasting changes in weather patterns and temperature, which increase the risk of phenomena such as extreme weather and global warming. Unlike other environmental issues, climate change is unique due to its global and long-term nature, its irreversibility, and the uncertainty involved in assessing its evolution and impact.

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Key impacts of climate change include an increase in natural disasters such as floods, storms, droughts, forest fires, heatwaves, and a rise in sea levels, some of which are already being experienced the world over. Not only do these phenomena adversely affect human health, but they also put livelihoods at risk, and disrupt the global supply chain, ultimately impacting economic growth.

MSMEs are particularly vulnerable to the climate change threat, due to their size and financial conditions, and any negative impact on this sector affects India's economy as well as livelihoods. Their vulnerability has already been demonstrated by the COVID-19 pandemic, which left the sector deep in debt with 71 per cent of MSMEs unable to pay salaries to their workers in March 2020.

The MSME sector contributes 30 per cent of the country's GDP and employs around 60 per cent of the national workforce. However, these businesses are relatively small in scale and do not have access to the kind of resources that large conglomerates and multinational corporations (MNCs) enjoy. If the supply chain is constrained due to any reason, MSMEs face a greater risk in operational continuity as they do not have the same vast networks of vendors and other service providers that global corporations do. Additionally, since investors are increasingly considering environment, social and governance (ESG) as a key aspect when evaluating potential investments, MSMEs looking for funding need to ensure they have a clear blueprint for it, to establish trust with potential investors.

While Business Responsibility and Sustainability Reporting (BRSR) is not mandatory for MSMEs, it is imperative that the MSMEs prepare for climate change and its impact as a critical threat and take mitigation measures to avoid the kind of pitfalls that were experienced due to the pandemic. Enterprise Risk Management (ERM) provides a holistic approach to risk management, and considers a variety of risks, including climate change, which MSMEs can leverage to protect their businesses against an uncertain future.

How does ERM help MSMEs in managing the impact of climate change to protect themselves?

ERM gives MSMEs the capability to assess the impact of climate change on their business and develop a programme that mitigates the material risks cost-effectively, helps make fact-based decisions, captures opportunities and tracks progress. It provides a proven approach to life cycle assessment, helping them manage environmental factors and emissions more effectively throughout the product value chain.

Adopting ERM helps MSMEs to evaluate their exposure to climate change issues—both from an operational and financial perspective—to model a range of scenarios and disclose these findings to investors.

ERM helps MSMEs look at the broader supply and value chain. Sourcing raw materials, designing products and launching into new markets can all be impacted by climate change. MSMEs need to ensure that not only individuals pass the global warming test, but also their entire brand.

ERM also encompasses knowledge of emerging vehicle and fuel technologies and provides tools to assess and find ways to reduce fleet-related emissions. It promotes effective energy management, helping to drive operational excellence and generate rapid energy savings. It also allows MSMEs to map carbon risk in the activities geographies they operate across and gives them access to advice on policy and regulatory changes related to climate and clean energy, to help them align their strategies to comply with the requirements.

Using ERM helps MSMEs gain economic and financial insight to develop risk-based mitigation strategies, as well as in developing risk assessments and response plans designed to protect them from the physical risks of climate change across the supply chain. For MSMEs that are trying to secure funding or looking to scale or in the process of enhancing their governance, ERM helps to accurately verify and increase disclosure of current and emerging risks and opportunities to investors and other major stakeholders.

ERM supports MSMEs by adopting a precautionary approach to environmental challenges and undertaking initiatives to promote greater environmental responsibility and encourage the development of environmentally responsible technologies and products.

One can learn more about enterprise risk management and how to protect your organisation from climate change risk with IRM's Level 2 examination.

What are some key principles MSMEs should consider when developing a climate change risk management strategy

Climate change risk management guidance by IRM Climate change Special Interest Group recommends some high-level principles that firms should consider when developing their climate change risk management strategy. They are:

  • It is important to identify the threats and opportunities in order to develop climate-friendly products and services
  • The business needs to establish a baseline for the level of change and impact that is expected
  • Adapt their existing business models while also developing new operational models
  • MSMEs must revisit their company purpose and assess their current business strategies.
  • Develop a strategy that aligns with the external requirements and expectations

The world has become increasingly aware of the need to reduce greenhouse gas emissions and to mitigate risks related to climate change. Businesses globally have started to take advantage of new business opportunities by dealing innovatively with the challenges related to climate change. For MSMEs in particular, climate risks are not just about the environment - they pose a definitive threat to their financial standing and reputation as well. It is more important, now than ever, for MSMEs to understand the importance of climate-related risks for their businesses and to formulate strategies to transform risks into opportunities.