Small and young businesses disproportionately bear the costs of climate change

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Report provides eye-opening new insights into the demographics of commercial victims of climate change. Young firms, which comprise not only the lifeblood of many communities but are central to national economies, do not insure against what they consider to be less frequent, extreme events, and are therefore, disproportionately bearing the costs of the vagaries of weather resulting from climate change.

With the frequency and severity of extreme weather events and unseasonal weather increasing as a result of climate change, Weather & Economics has reported on the far-reaching effects to a wide range of sectors, including agriculture (particularly for farmers of citrus fruits, avocadoes, cocoa, viticulture, and cereals) as well as for the sectors of finance, sporting events, travel, transport, automobile parts, fashion and apparel, construction, food and beverages, and snow removal, to name but a few.

The Harvard Business Review reports that firm age and size affect firms’ financial management of these risks. Building upon recent contributions from dynamic risk management theory, the authors confirm that small and young businesses are less likely to insure against weather risks and to use credit after a shock. As a result, they are disproportionately more vulnerable to the effects of climate change.

This is a particularly troubling finding because small and young businesses account for 50% of employment and 45% of GDP, and start-ups are particularly significant contributors to economic growth. The reasons for this are diverse, but generally this is due to an unwillingness to divert resources from production to risk management, as well as deficiencies in management knowledge and financial management abilities as they struggle with internal financial and human resources issues and external relationships along the supply chain.

Historically speaking, unseasonal weather and extreme weather events may not have had such a significant impact and may rightly have been put off for managing these day-to-day risks and challenges. However, since the 1950s, many of the observed changes to our climate are unprecedented over decades to millennia, and continued emission of greenhouse gases will cause long-lasting changes in all components of the climate system, increasing the likelihood of severe, pervasive and irreversible impacts for people and ecosystems. Today, approximately 70% of business sectors worldwide are exposed to weather variability. Thus, the risk management framework of young and small businesses must be radically adapted to incorporate weather risks as a matter of urgency.

In particular, the authors found that almost one-third of firms in the study had no insurance of any kind, and young firms and small businesses generally insured at much lower rates, even for basic weather-related risks such as property insurance, business interruption insurance and flood insurance, let alone none having in place a systematic climate change risk mitigation strategy or index-based weather insurance to protect them against day-to-day losses in profits and increased costs associated with unseasonal and extreme weather events.

As a result, these same firms have to reply on applications for credit when experiencing weather-related setbacks rather than depending on insurance payments to see them through. The authors warn that they are consequently more likely to experience reduced access to credit and higher credit rates. Of those firms that can take on debt to carry them through weather-related losses, including to replace lost assets and other operating needs, debt repayment remains the focus of the firm long after the weather-related loss. Clearly, debt repayment as a priority over growth puts young and small firms’ viability into question.

The Harvard Business Review reports that making risk a priority is essential to firms of all sizes. Specifically, business owners must relinquish the idea that managing risks is a distraction from core business, and instead consider the potential for strategic opportunities to arise from them and even create value. The authors suggest that parametric insurance products such as index-based weather insurance is an effective and efficient means to reduce and transfer the risks associated with climate change for young and small firms.

Indeed, one financial leader, BNP Paribas, one of the largest banks in the world, has recently partnered with Meteo Protect, the European leader in weather risks management, to offer all BNP Paribas corporate and institutional clients a complete range of weather risk financial management solutions.

As Artemis, the longest running news and analysis service for the re/insurance and risk transfer sector reported on the significance of this development: “The partnership will extend access to insurance and reinsurance capital to BNP Paribas corporate and institutional customers, which is a shrewd approach as this is a captive audience of potential customers who may never have been approached about weather risk transfer solutions before.”

The likelihood of increasing weather variability, unseasonal weather, and extreme weather events are on the rise and it goes without saying that small and young businesses, which play such an important role in national economies should not disproportionately suffer or be undermined as a result. BNP Paribas and Meteo Protect are leading the way in ensuring that business owners have the risk management products and solutions at their disposal to manage today’s climate risks and profit from today’s climate opportunities, with firms of any size encouraged to shore up their risk management strategies.