The Business Sector Prioritization tool was developed by the World Resources Institute. This document provides a step-by-step guidance on how to use the tool. This document can be used with the Power Point presentation on this tool. Business Sector Prioritization and Engagement Tool 1. Introduction Many economic sectors (e.g. agriculture, tourism sectors) are at risk from climate change related hazards such as droughts, cyclones, storm surge and flooding, sea level rise. Developing economies, such as small Pacific Islands and least developed African countries, are among the most vulnerable ones to climate change impacts. For instance, the Pacific Climate Change Data Portal has shown that climate change is happening in Fiji and will only become more severe in the future. This will bring more frequent climate extremes, heightened variability of weather patterns, and long-term changes to the norms of the climate. This will also mean more severe damages to various economic sectors and local livelihoods. Therefore, it is important to engage the private sector, in particular those of micro and small enterprises (MSEs) in adaptation early on to build resilient societies to climate change (Dougherty-choux et al., 2015). In this section, private sector refers to MSEs, which include sole proprietors, smallholder and family farms, and enterprises with under 19 employees. At both the national and international level, the discussion often neglects the smaller businesses at the base of the private sector pyramid—the businesses that make up the fabric of most developing countries. MSEs comprise of farmers, shop owners, restaurant owners, fabric makers, etc. who provide the goods and services needed in small communities, many of which operate in the informal economy. Many of these communities are in rural, hard to reach areas, where large companies do not typically operate. These businesses keep the community running and without them, the economy would most likely collapse and people would lose their livelihoods. In sum, they constitute the bedrock of economies in developing countries where most vulnerable communities exist, but tend to have fewer resources to adapt to climate change than do larger enterprises. Thus far the discourse on ‘leveraging the private sector’ in adaptation has focused on mobilizing finance from large multinational corporations and financial institutions and using funding from bilateral donors, and multilateral banks for adaptation projects. Although financial assistance from donors, multinational corporations, and others, has a central role in planning for adaptation, adaptation at scale cannot be achieved without the involvement of the private sector investing in its own climate resilience. Because Developing countries rely heavily on the private sector for economic growth and job creation, and the private sector relies heavily on people and resources that are being impacted by climate change, therefore the government should foster an enabling environment for the private sector to build its own adaptive capacity in the face of climate change to sustain people’s livelihoods. However, within a real
Transcript
The Business Sector Prioritization tool was developed by the World Resources Institute. This document provides a step-by-step guidance on how to use the tool. This document can be used with the Power Point presentation on this tool.
Business Sector Prioritization and Engagement Tool
1. Introduction
Many economic sectors (e.g. agriculture, tourism sectors) are at risk from climate change related hazards such as droughts, cyclones, storm surge and flooding, sea level rise. Developing economies, such as small Pacific Islands and least developed African countries, are among the most vulnerable ones to climate change impacts. For instance, the Pacific Climate Change Data Portal has shown that climate change is happening in Fiji and will only become more severe in the future. This will bring more frequent climate extremes, heightened variability of weather patterns, and long-term changes to the norms of the climate. This will also mean more severe damages to various economic sectors and local livelihoods. Therefore, it is important to engage the private sector, in particular those of micro and small enterprises (MSEs) in adaptation early on to build resilient societies to climate change (Dougherty-choux et al., 2015). In this section, private sector refers to MSEs, which include sole proprietors, smallholder and family farms, and enterprises with under 19 employees. At both the national and international level, the discussion often neglects the smaller businesses at the base of the private sector pyramid—the businesses that make up the fabric of most developing countries. MSEs comprise of farmers, shop owners, restaurant owners, fabric makers, etc. who provide the goods and services needed in small communities, many of which operate in the informal economy. Many of these communities are in rural, hard to reach areas, where large companies do not typically operate. These businesses keep the community running and without them, the economy would most likely collapse and people would lose their livelihoods. In sum, they constitute the bedrock of economies in developing countries where most vulnerable communities exist, but tend to have fewer resources to adapt to climate change than do larger enterprises. Thus far the discourse on ‘leveraging the private sector’ in adaptation has focused on mobilizing finance from large multinational corporations and financial institutions and using funding from bilateral donors, and multilateral banks for adaptation projects. Although financial assistance from donors, multinational corporations, and others, has a central role in planning for adaptation, adaptation at scale cannot be achieved without the involvement of the private sector investing in its own climate resilience. Because Developing countries rely heavily on the private sector for economic growth and job creation, and the private sector relies heavily on people and resources that are being impacted by climate change, therefore the government should foster an enabling environment for the private sector to build its own adaptive capacity in the face of climate change to sustain people’s livelihoods. However, within a real
economic world, policymakers are often challenged by resource constraints. Some of the key questions remain to be answered in many developing countries, including:
x Which sectors are among the cost-effective ones to be first engaged in climate adaptation? x What barriers are existing and hindering the process of private sector engagement? x What interventions could be undertaken by the government to facilitate such engagement?
This tool is designed to answer these questions. In particular, it aims to arm government officials with simple yet robust toolkit that can help them prioritize economic sectors for climate change adaptation, and apply processes to engage businesses in becoming more resilient to climate change impacts and safeguard local livelihoods. Another goal of developing this toolkit is to influence the development of National Adaptation Plans to incorporate small businesses in their future plans.
2. Methodology The public sector has a central role to play in helping society adapt to the effects of climate change, while promoting economic development (Cimato and Mullan 2010). To effectively engage businesses, whether MSEs or large corporations, policymakers need to have an understanding of what are the priority business sectors that need to adapt to climate change, and what drives (or constrains) businesses to invest, as they try to determine ways in which to catalyze investment in risk management and products and services that support, facilitate, and advance climate change adaptation at scale. Furthermore, policymakers need to design/use public interventions in a way that encourages the private sector to become more resilient, in particular when markets are not functioning. To support policymakers to better engage private sectors in climate change adaptation, WRI and UNDP have jointly launched a report at COP 21 in Paris in 2015, entitled “Adapting from the Ground Up. Enabling Small Businesses in Developing Countries to Adapt to Climate Change”, which proposes a framework to policymakers to tackle private sector engagement to adapt to climate change challenge. Figure 1 illustrates a set of six principles that the public sector can use in designing interventions to better promote adaptation by MSEs:
x Engage stakeholders. Policymakers at the national level need to engage stakeholders, such as businesses and their representatives, early in the policy design process in order for policymakers to understand the relevant drivers and barriers that private sector faces and design effective policy options.
x Prioritize vulnerable sectors. Every country has a diverse base of economically important sectors. Climate change will affect most economic activities either directly or indirectly. To target indirect risks that affect all sectors, policies might need to be cross-sectoral in order to create a general enabling environment for business growth. However, blanket policies that aim to engage “the private sector” are not likely to be effective because the drivers and barriers to successful adaptation differ among sectors and even within a sector. Therefore, when starting the process of designing policies to catalyze MSE engagement, policymakers need to prioritize sectors for engagement.
x Identify drivers of investment in adaptation. Understanding what drives private sector investment in adaptation in a sector is important as it determines the design of interventions and regulation.
x Identify barriers preventing investment in adaptation. Policymakers need to identify the barriers to adaptation, and once that’s done, they can design interventions that create an enabling environment for small businesses to adapt.
x Design interventions to catalyze MSE investment in adaptation. The public sector should design policies and interventions that create an enabling environment for MSEs to adapt to climate change. This is necessary for successful private sector engagement, and it is an integral part of addressing the barriers facing MSEs.
x Implement and scale up. There are various ways through which interventions can be scaled, either bottom-up starting with several pilot projects or top-down through a nation-wide program of reforms. Developing new successful approaches requires investment in a wide range of possible adaptation activities to test what works while identifying critical barriers and success factors.
Figure 1 Principles for Designing Interventions to Catalyze MSE Investment in Adaptation (Dougherty-choux et al. 2015) Through stakeholder engagement, the BSPE tool enables the user to learn, step-by-step, (1) how to prioritize private sectors for climate adaptation investment, (2) how to identify drivers and barriers that affect private sector engagement in adaptation, and (3) what are the policy interventions that encourage private sectors to engage in climate change adaption. The tool does not focus on who to scale up interventions. For guidance on how to scale interventions, please see the tool on Rapid Diagnostic Tool to Assess Scaling Potential in section 4 of this toolkit. As shown in
Figure 2, the BSPE tool shall answer these three questions in sequence order so that policymakers will be able to identify private sectors that urgently need to engage in adaptation and the barriers that prevent them from investing and engaging in adaptation. Once barriers are identified, policymakers can design appropriate interventions to remove these barriers and create enabling conditions to drive private sectors to increase investment in adaptation.
Figure 2 key guiding questions of the BSPE tool for helping policymakers effectively engage private sectors in climate change adaptation It is important to note that the BSPE tool consists of three key components that are designated to address each of these three questions, including (1) private sector prioritization framework, (2) identification of sector engaging barriers, and (3) identification of policy interventions Q1: How to prioritize private sectors to engage in adaptation?
x Understanding the Analytical Framework The International Finance Corporation (IFC) and European Bank for Reconstruction and Development (EBRD) has developed a prioritization framework to help understand which sectors of an economy could be priorities for investments in climate resilience. As illustrated in Figure 3, the objective of the IFC framework is to identify the prior sectors that are most economically important and climatically vulnerable by scoring and ranking selected economic and climate change sensitivity criteria.
Q1. How to prioritize private sectors to engage in
adaptation?
Action: Gather sectoral economic data, and prioritize private sectors in
terms of their economic importance
and vulnerability to climate change.
Q2. What are the barriers preventing business from engaging in adapation?
Action: Identify and assess possible
barriers that prevent key private sectors
from being engaged in adaptation
activities.
Q3. What are the policy intervations to effectively remove the engagement
barriers?
Action: Identify policy measures/
interventions that could remove barriers
to engage private sectors more effectively.
Figure 3. Objective, Criteria and Actions proposed in IFC and EBRD prioritization framework (Adapted from IFC and EBRD, 2013)
x Analytical Steps and Expected Outcomes More specifically, users of this BSPE tool should be able to prioritize private sectors following a four step
approach (
Figure 4).
Figure 4. 4 steps for prioritizing private sectors for climate adaptation engagement
Objective
To identify sectors that were most economically important and climatically vulnerable
Criteria
Economic metrics: Production value ($), Employment numbersClimate change metrics: energy, ecosystems, transport, water, large fixed
assets, market demand, Other climatically sensitive raw materials
Actions
•Ranking economic metrics, estimated economic importance based on national statistics
•Soring climate change metrics, expert judgment based on the level of use and dependency on climatically sensitive infrastructure and systems (CSIS)
Step 1: mainly gather statistical data from relevant government agencies on sectoral contribution to GDP and employment. Step 2: rank private sectors from the highest to lowest in terms of their respective contributions to GDP and the total number of jobs created in the sector. Step 3: organize a stakeholder/expert consultation to score and rank sector vulerability to climate change based on their understanding of the level of use and dependency of sectors on climatically sensitive infrastructure and systems. Scoring vulerantiblity can use a climate vulnerability index, where a 3-level score system may be used (Table 1). Table 1. Score system used in IFC and EBRD prioritization tool
Score system Score indication Score 3 Heavily dependent upon a Climatically Sensitive Infrastructure and Systems
(CSIS) for the operation of the majority of this sector’s core business activities. Sector typified as having large fixed assets, being heavily dependent on transport infrastructure, and a large consumer of raw materials (often with specifically engineered provision of water/ energy, etc.). Likely to be directly supported by ecosystem services. Disruption to CSIS, even for a short period, could cause an interruption in business continuity.
Score 2 Moderately dependent on CSIS for the operation of the majority of the sector’s core business activities.
Score 1 Low dependency on CSIS for the operation of the majority of the sector’s core business activities. Although sector may utilise CSIS, business can continue to operate during disruption to CSIS
Step 4: combine the overall scores of economic importance and climate change vulnerability by sectors and prioritize the ones that give the highest combined scores. Q2: What are the barriers preventing business from engaging in adapation? Generally, businesses make investments in adaptation for two primary reasons:
x To increase the climate resilience of their business x To harness new opportunities arising from a changing climate
Users of this the BSPE tool will need to facilitate a group meeting with relevant departments in the government to discuss what are the key barriers, in their particular country context, are preventing private sectors, in particular MSEs, from investing in adaptation. Dougherty-choux et al. (2015) reviewed case studies and relevant literature and their findings show that barriers that prevent businesses from engaging in adaptation can be grouped into six categories at three levels (Figure 5). It should be noted that barriers presented in Figure 5 are generic and may be used as a guidance for readers to analyze and identify what are the specific barriers that are now in place hindering the process of private sectors, particularly the prioritized sectors, engaging in adaptation.
Figure 5. Barriers preventing business from engaging in adaptation (Source: Dougherty-choux et al., 2015) Level 1: Business-level barriers
x CLIMATE KNOWLEDGE AND RISK ASSESSMENT. Information about the risks and uncertainties that are relevant (by geography and sector) to the planning and decision-making processes of MSEs is sometimes unavailable or inaccessible.
x FINANCIAL CAPACITY TO IMPLEMENT ADAPTATION MEASURES. In many cases, adaptation requires new investment. Some investments can have large upfront costs, relatively long payback times, and uncertainties related to future climate impacts. Banks and other financial intermediaries, recognizing unfavorable risk-return profiles, might hesitate to invest in adaptation, making it difficult for MSEs to obtain financing. Knowledge of alternative types of national instruments that can adjust the risk-reward profile might be limited and/or beyond the capacity of MSEs to access, for a variety of reasons.
x TECHNICAL CAPACITY TO IMPLEMENT ADAPTATION MEASURES. Adopting new business processes, developing new products or services, and implementing new technologies for increased resilience often require technical skills and expertise, which might themselves require upfront investment. This may not always be possible given tight margins in the context of their ongoing business ventures.
x SOCIAL DIMENSIONS OF ADAPTATION. Class, gender, and culture play a large role when deciding among adaptation options. Although often overlooked, the social context can be a significant barrier to the adoption of new technologies and production methods. Because people’s decisions are influenced by cultural and demographic factors, the adaptive capacity of individuals varies across regions and countries.
Level 3General business environment
Level 2Institutional, policy and regulatory
environment for adaptation
Level 1Business-level barriers
•Availability and knowledge of cost-effective adaptation options (access to markets)
•Institutional factors (regulations and policies affecting investment in climate adaptation)
•Awareness and knowledge of climate risk•Technical capacity to implement•Financial capacity to implement•Social attitudes
Level 2: Institutional, policy and regulatory environment for adaptation
x POLICIES AND REGULATIONS. Government institutions can play an important role by removing policy obstacles to the adoption and diffusion of adaptation practices and creating an enabling environment. Investments can be incentivized through a variety of financial instruments at policymakers’ disposal, and information and knowledge can be communicated to local businesses. In many developing countries, however, national and local government institutions themselves suffer from capacity constraints that limit these approaches.
Level 3: General business environment
x IDENTIFICATION AND EVALUATION OF COST- EFFECTIVE ADAPTATION MEASURES. Adaptation does not yet have a standard “menu” of actions from which enterprises can choose; they must develop their own location- and time- specific adaptation measures. Few tools are available to help small enterprises develop such measures, or to assess their feasibility and cost-effectiveness. Moreover, adaptation options must be competitive with non-adaptation options in terms of product price, operating cost, or sustainability of production. Many enterprises therefore struggle to identify and choose adaptation options.
Q3: What are the policy intervations to effectively remove the engagement barriers? Once the engagement barriers for prioritized sectors are identified, policymakers should choose the interventions that best address the barriers in a given sector and create enabling conditions for MES to invest in measures that increase climate resilience or leverage business opportunities in their own countries or regions. In reality, policy interventions always encounter a complex set of challenges, and effective solutions will usually involve a variety of policy instruments targeting a variety of objectives. Although many governments do not have the capacity to provide sufficient public support (especially finance) to enable all businesses to invest in adaptation, they do have the influence and capacity to work with non-governmental organizations (NGOs), financial institutions, and international organizations to cooperate in smoothing the path for MSEs trying to develop risk management options. Dougherty-choux et al. (2015) outlined six types of interventions:
(1) Business-relevant climate information and risk analysis; Governments, development partners, and other groups can disseminate climate change information through educational programs, the media, demonstration projects, skill-development trainings, and by publicizing opportunities for adaptation projects.
(2) Technical assistance and training; The public sector should support information sharing, research and development, and skill building through demonstrations and trainings about adaptation options. Capacity building on the use of climate-related information and tools to incorporate risks in planning, budgeting, and implementation of measures is critical to engaging MSEs in adaptation.
(3) Government policies that enable investments in adaptation; Governments should consider integrated planning across various ministries to implement adaptation plans that conserve resources, improve productivity, and strengthen the resilience of communities. In fact, many possibilities exist in the realm of enabling policies (incentives and compliance measures) to motivate MSEs to undertake investment in climate resilience and business development. Regulatory and fiscal incentives can stimulate risk reduction among private sector actors, especially when combined with climate information and capacity building. In addition, in most
countries, public utilities govern critical resources, such as energy and water, to regulate prices and avoid possible market failures. Proper pricing can influence MSEs to increase efficiency and reduce their vulnerability to climate-sensitive resources such as water and energy.
(4) Market and business development; With capacity and/or financial support from public and private stakeholders, MSEs can produce or offer what people want, from services that boost resilience to certified products. Support can encompass funding for research and development, pilots to demonstrate business value and stimulate market demand, development of market linkages across the value chain, and scale-up through larger investments. Public spending on the development of physical and market infrastructure encourages further adaptation, through diversification, economic growth, sustainability, trade, and attraction of additional foreign investment.
(5) Partnerships and cooperatives; A cost-effective way for MSEs to overcome their limited resources is to collaborate with other businesses or public entities to form partnerships and cooperatives in a similar sector or region, pool resources and funding, and self-insure against economic and weather-related shocks. MSEs can partner with other businesses, NGOs, or communities to benefit from local and sectoral knowledge, better understanding of targeted consumers, improved dissemination and delivery of their goods and services, co-financing, and risk sharing. They can also partner with much larger multinational corporations.
(6) Financial instruments. MSEs in vulnerable communities usually take on significant risk, environmental, technological, or economic, making it difficult for financial institutions to provide loans or insurance coverage. The public sector, with the assistance of international donors or large financial institutions, can initiate policies that provide insurance products that transfer risk to another entity and make private financial interventions possible. Financial instruments used include public loans, grants, seed capital, and investments.
A clear categorization of different government inventions is an important initial step for identifying the best interventions to address specific barriers for a given sector. Table 2 below provides specific examples showing what interventions could be considered for removing these barriers, however, it should be noted that the necessity of these interventions for removing a specific barrier may vary depending on the country-specific context. Table 2 Interventions addressing barriers to MSE investment in adaptation
Source: (Dougherty-choux et al., 2015) Private sector investment in adaptation, particularly at the small business level, will not only benefit business-owners but also employees, households and others in the extended value chain. As such, the private sector would become a valuable ally in building climate-resilient communities and societies from
the bottom up. Governments need to lower the barriers facing the private sector and incorporate these reforms in a national policy agenda. While policymakers are the final decision-maker in the process, they require close partnerships with businesses, NGOs, civil society organizations, and international organizations to be most effective. References Dougherty-choux, L., Terpstra, P., Kammila, S., and P. Kurukulasuriya. 2015. Adapting from the ground up - Enabling small businesses in developing countries to adapt to climate change, WRI & UNDP report, Washington DC. Cimato, F. and M. Mullan. 2010. “Adapting to Climate Change: Analysing the Role of Government.” Defra Evidence and Analysis Series. London, U.K.: Crown. IFC and EBRD (European Bank for Reconstruction and Development). 2013. “Climate Risk Case Study—Pilot Climate Change Adaptation Market Study: Turkey.” Washington, D.C.: IFC and IBRD.
IDENTIFYING OPTIONS TO ENGAGE BUSINESSES IN ADAPTATIONMoushumi Chaudhury1 April 2016Nairobi, Kenya
Definition of Micro and Small Enterprises: Sole proprietors (individuals), smallholder and family farms, and enterprises with 49 and fewer employees (IFC 2012). Many of these entities operate in the informal economy (Bacchetta et al. 2009).
Source: MDG Report 2015
01020304050607080
Sub-SaharanAfrica
East Asia &Pacific
Middle East &North Africa
Europe &Central Asia
Latin America& Caribbean
Rural population (% of total population)
2000
2012
Source: World Bank, World Development Indicators.
AGRICULTURE MATTERS
WHY FOCUS ON MSE ADAPTATION?
• Their nimbleness makes them instrumental in increasing adaptive capacity.
• MSEs may lack awareness, information, and assessment tools.
• Lack of organizational capacity and finances to adapt
Source: Dougherty-Choux et al. 2015; Sep et al. 2008
SIX STEPS TO ENGAGE BUSINESSES IN ADAPTATION
Source: Doughtery-Choux et al. 2015
1
2
3
4
5
6
Source: IFC
Approach: reply on expert judgment on sector dependency on climate change
Approach: rely on macro-economic statistical data provided by relevant ministries.
STEP 2: PRIORITIZE VULNERABLE SECTORS
STEP 2: VULNERABILITY RANKING OF FIXED ASSETS
Source: IFC
Score system Score indication
Score 3 (Shaded Red)
Heavily dependent upon a CSIS for the operation of the majority of this sector’s core business activities. Sector typified as having large fixed assets, being heavily dependent on transport infrastructure, and a large consumer of raw materials (often with specifically engineered provision of water/ energy, etc.). Likely to be directly supported by ecosystem services. Disruption to CSIS, even for a short period, could cause an interruption in business continuity.
Score 2 (Shaded Orange)
Moderately dependent on CSIS for the operation of the majority of the sector’s core business activities.
Score 1 (Shaded Green)
Low dependency on CSIS for the operation of the majority of the sector’s core business activities. Although sector may utiliseCSIS, business can continue to operate during disruption to CSIS
STEP 2: ECONOMIC & VULNERABILITY RANKING
Source: International Finance Corporation & European Bank for Reconstruction and Development, 2013
Score 3 (shaded red): Heavily dependent upon a CSIS for the operation of the majority of this sector’s core businessactivities.
Score 2 (shaded orange): Moderately dependent on CSIS.
Score 1 (shaded green): Low dependency on CSIS
STEP 3: WHAT DRIVERS BUSINESSES TO INVEST IN ADAPTATION?
Reducing climate risk
Gaining financial or strategic benefit
Responding to government regulations
Source: Doughtery-Choux et al. 2015
STEP 4: BARRIERS FOR BUSINESSES TO ENGAGE IN ADAPTATION
Level 3General business
environment
Level 2Institutional, policy and regulatory environment
for adaptation
Level 1Business-level barriers
• Availability and knowledge of cost-effective adaptation options (access to markets)
• Institutional factors (regulations and policies affecting investment in climate adaptation)
• Awareness and knowledge of climate risk
• Technical capacity to implement• Financial capacity to implement• Social attitudes
STEP 5: DESIGN INTERVENTIONS
Source: Dougherty-Choux et al. 2015
Business-relevant climate information and
risk analysis
Technical assistance
and training
Laws and
policies
Public utility
pricing
Subsidies and tax
reliefs
Demand-driven
products and services
Public spending on
infrastructure
Business partnerships
and cooperatives
Public-private
partnerships
Risk transfer
instruments
Risk compensating instruments
Lack of climate knowledge and risk assessment 9 9 9 9 9 9
Weak evaluation and selection of cost-effective adaptation
measures9 9 9 9 9 9
Limited technical capacity to implement adaptation measures 9 9 9
