Indian MSMEs Need to Embrace Climate Adaptation for Survival

Industries around the world are increasingly undertaking climate change mitigation by reducing the carbon footprint of their operations and supply chains. However, many climate change impacts are inevitable and add to the vulnerability of industries, especially Micro, Small and Medium Enterprises (MSMEs). MSMEs contribute 29% to India’s Gross Domestic Product (GDP), employ over 110 million workers and play a crucial role in shaping the country’s social and economic landscape. Their vulnerability to climate change impacts makes building their climate resilience crucial.

What Makes MSMEs Vulnerable to Climate Impacts

Climate change and associated hazards severely impair MSMEs, disrupting not just their daily operations but the entire value chain. From fluctuating costs and delayed deliveries to unpredictable material availability, along with shutdowns caused by floods and degraded infrastructure, the risks they face are vast and multi-faceted.

In December 2023, cyclone Michaung hit Tamil Nadu, impacting 4,800 MSME units across 24 industrial estates, leading to losses worth at least USD 360 million. In 2022, Gujarat industry was affected by heavy rainfall resulting in disruption of goods’ movement and factory production leading to about 600 million USD in losses. Similarly, Chennai floods (2015), Kerala floods (2018) and cyclone Fani in Odisha (2019) have all resulted in substantial losses for MSMEs, ranging from crores of rupees to tens of thousands of affected units.

The impact of extreme heat and humidity on industrial operations and workers is also conspicuous. Between 2001 and 2020, India lost around 259 billion hours of labor or USD 624 billion (INR 46 lakh crore) annually due to the impacts of heat and humidity. An ILO 2019 report suggests that by 2030, India may account for a staggering 34 million of the projected 80 million global job losses from heat stress-related productivity decline. Humid heat is also likely to result in inventory damage, malfunctioning of machinery, rusting of equipment and increased demand for cooling. In addition, increased heat heightens the risk of industrial fire outbreaks and chemical hazards in manufacturing units.

Unlike big industries, MSMEs often struggle to bounce back from such exogenous blows due to limited financial capacity, lack of awareness, inadequate skills and weak policy support. Climate-related risks thus add another layer of uncertainty and fragility to MSMEs.

Why Climate Adaptation is Crucial for MSMEs

These risks make it essential that MSMEs adapt and build resilience across the board. Embracing climate adaptation is necessary for their long-term competitiveness and survival. Adaptation can be a win-win situation, resulting in several benefits.

1. Reduced risk, increased resilience: Investing in measures like floodproofing infrastructure, active and passive heat measures for thermal comfort, water-efficient technologies and disaster risk reduction plans can minimize infrastructural damage and supply disruptions, protect revenue streams and ensure a productive workforce.
2. Cost saving and innovation: MSMEs can benefit from the adoption of green practices, climate-resilient technologies and nature-based solutions. These can lower operational costs, improve resource management, and could drive product innovation.
3. Competitive edge: Consumers are increasingly looking for businesses that supply sustainable products and services. By demonstrating their commitment to environmental responsibility and compliance with green standards, MSMEs can seize new market opportunities and be well ahead of the curve.

Climate Adaptation Levers for MSMEs

Different sectors and industries need tailored strategies, considering their unique vulnerabilities to climate change. Both individualistic and institutional actions are required to refine practices, structures and technology in accelerating climate adaptation in MSMEs. Here are some of the key levers that can encourage MSMEs to engage in climate adaptation and foster resilience building.

• Raise Awareness and Acceptance

Not realizing the full scope of the risks posed by climate change, many MSMEs prioritize profitability and financial stability, leaving less room for sustainability efforts. To bridge this gap, clear communication is essential. We need to raise awareness of the specific climate vulnerabilities impacting MSMEs and emphasize the importance of adaptation. Messaging must use a language that resonates with the realities faced by them. Framing adaptation as a benefit rather than a burden is key. One way to achieve this is to share real-world success stories of climate adaptation undertaken by MSMEs. Highlighting the potential for reduced risks, higher competitiveness, product innovation and cost-saving can serve as effective motivators for MSMEs to accept and adopt climate-resilient practices.

• Financial Incentives

Many MSMEs struggle to invest in climate-resilient technologies due to limited financial resources, high upfront costs and lengthy payback times. Financial incentives can empower MSMEs to overcome these hurdles and become active participants in building a climate-resilient future. Initiatives like subsidies, soft loans and tax breaks can make climate-friendly investments more affordable. The knowledge gaps and financial constraints faced by MSMEs can also be addressed by developing educational material and conducting technical assistance programs on how to access the different financial instruments available to them.

• Policy and Collaboration

Mainstreaming climate resilience and adaptation for MSMEs requires a combination of supportive policies that create an enabling environment and a collaborative approach that fosters local ownership. A range of MSME schemes exist with varied goals offering several "entry points" to integrate climate resilience interventions. For instance, existing skill development programs can be expanded to include modules on climate-smart practices, resource efficiency and disaster preparedness. Similarly, schemes advancing credit support and regulatory incentives to MSMEs can be tailored towards encouraging sustainable businesses and green technology or infrastructure. While top-down policies provide a framework, successful execution hinges on collaboration between MSMEs, industry groups, government and nonprofits to foster local solutions and community buy-in.

The vulnerability of MSMEs to climate hazards necessitates a multi-pronged approach. Leveraging the aforesaid levers can empower enterprises to tackle climate challenges and adopt suitable solutions. By adapting to climate risks, Indian MSMEs could make an investment that not only secures their future but also contributes to a more sustainable and resilient economy.

WRI India under its Resilient, Inclusive and Sustainable Enterprises (RISE) initiative supported by the Ares Charitable Foundation’s Climate Resilient Employees for a Sustainable Tomorrow (CREST), is helping MSMEs in Tamil Nadu and Gujarat transition to climate resilience pathways. You can read more about RISE here.

All views expressed by the authors are personal.