Why is there a lack of adaptation of the private sector in Spain to climate change?

Many organizations mistakenly perceive that the implications of global warming will materialize in the long term and are not necessarily relevant to their present decisions.

According to the latest report on Spanish small and medium-sized enterprises (SMEs) of the Central Business Directory (CBR) of Spain, in 2021 there were 3.4 million companies, 99% of which were SMEs (with less than 250 workers), while 0.1% were large companies (with more than 250 workers).

SMEs offer work to more than 10 million inhabitants in Spain, representing a key piece for the Spanish economy. Globally, these companies generate approximately 50% of GDP and between 60-70% of employment.

While SMEs constitute such an important part of our economic system, auditing non-financial reports and participating in ESG projects with the private sector in Spain, clear evidence can be found that many of these SMEs are not prepared to adapt to climate change.

Indeed, the large-scale, long-term nature of climate change makes it a unique challenge, especially in the context of economic decision-making.

Consequently, many organizations mistakenly perceive that the implications of climate change will materialize in the long term and are therefore not necessarily relevant to their present decisions.

First, there is a considerable gap in knowledge and awareness about what climate adaptation is and the importance of adapting. Many Spanish SMEs are not aware of the risk they will face in the future, while simply claiming that their activities are not directly affected by climate change.

Some SMEs report that the only impacts they will face is an increase in prices (of fossil fuels and raw materials). This contrasts with the situation of the largest and most listed companies, where greater and growing efforts are seen in their reports when facing greater demands from investors and international laws.

Major stakeholders have been trying in recent years to raise awareness about the importance of estimating the risk exposure of companies and their business, as well as implementing some climate adaptation initiatives in their sector.

A clear example is the communication of the future approval of a Royal Decree (before May 2023) in development of article 32 that will make mandatory the application of Law 7/2021 on climate change and energy transition in Spain.

The implications of this law will force companies to have a more in-depth study of the impacts of climate change and its adaptation measures and other related assessments, including assessments of climate risks and opportunities, which cannot be adequately carried out in a few days.

While SMEs should start preparing, we still find that there is not much action on their part, as seen by auditing their non-financial statements and talking to representatives of each of the companies.

Second, many SMEs confuse climate adaptation with climate mitigation. In several cases, when checking the data from the audited reports, we find sections entitled adaptation and climate mitigation that focus solely on actions that mitigate climate change, while the difference and implications of these two concepts are considerable.

In simple terms, climate mitigation involves all activities that aim to reduce the carbon footprint, including measures to reduce CO2 emissions from energy consumption and business travel, increase renewable energy consumption relative to non-renewable energy, and implement energy efficiency measures, among many others.

On the other hand, climate adaptation is all those measures that anticipate and prepare for the consequences of climate change, taking advantage of the opportunities it presents, avoiding or minimizing negative impacts.

In this sense, climate adaptation measures include disaster preparedness protocols (disaster response mechanisms to avoid or mitigate the negative impacts of droughts and floods), climate risk assessments before deciding on the location of a company, installation of rainwater tanks, green roofs to reduce temperature and protect biodiversity, insurance to protect companies against climate risks, and a huge etcetera of less expensive actions to adopt now.

When reading the non-financial statements, you can see many efforts in companies to reduce their carbon footprint by increasing their consumption of renewable energy, implementing energy efficiency mechanisms and planting trees to offset their carbon footprint (and many others, depending on the sector). However, climate adaptation is always left in the background.

In addition, despite these efforts, many of the SMEs in Spain do not have carbon reduction targets in place, while most do not have enough resources to calculate scope 3 emissions. This seems to imply that they don’t really have a well-established plan to monitor and reduce their carbon footprint.

Failure to adapt or act against climate change exposes these companies to a series of risks, in addition to those that may arise from the impacts of climate change itself (physical risks).

According to the final report of the Task Force on Climate-related Financial Disclosures (TFCD), companies may face the following risks:

1. Legal and regulatory risks: regulatory risks refer to the risk of facing greater financial burdens from new green policies, for example, while legal risks refer to the risk of receiving legal claims due to the organization’s failure to mitigate the impacts of climate change, failure to adapt to climate change, and insufficient disclosure around material financial risks.
2. Technology risk: The adoption of low-carbon and energy-intensive technologies creates a competitive advantage for companies as they obtain lower distribution and production costs. Companies that do not adopt or cannot adopt these technologies may become displaced from the market.
3. Market risk: refers to changes in supply and demand for certain products, commodities and services arising from climate-related risks and opportunities.
4. Reputational risk: This risk refers to changing customer or community perceptions of an organization’s contribution or detraction to the transition to a lower-carbon economy.

On the other hand, there is another trend that is growing more and more: companies are now hiring more sustainability consultants or ESG as part of their workforce, creating new sustainability departments.

In fact, there is a big difference when comparing companies that do not have a professional in sustainability issues with those that do have professionals (with expert knowledge) in charge. The latter tend to have more projects and greater control of information related to the environment.

Finally, thanks to new national and European laws that will be passed soon, such as the Directive on Corporate Due Diligence in Sustainability and the Corporate Sustainability Reporting Directive (CSRD), more companies will incorporate sustainability experts as part of their workforce and more action will be seen in the private sector in the coming years.

Those companies that fail to adapt and respond in time to climate change will not only reduce their corporate profits in the future, but may even be displaced from the market.

Source: The Vanguard