Why are SMEs Unprepared for Future Climate Shocks?

Contrary to popular belief, SMEs are responsible for substantial greenhouse gas emissions, resource utilisation and pollution. The impact of climate risks on SME supply chains affects everything from sourcing of raw materials to distribution and financial stability. SMEs are particularly vulnerable because of their limited resources and bargaining power.

Burdening Greater Risk

Severe weather phenomena like floods, droughts, wildfires and hurricanes can damage infrastructure, halt or disrupt transportation and delay delivery of raw material and finished goods.

For instance, the floods in Kerala and Cyclone Amphan in eastern India wrecked SME supply chains, triggering crop losses and delayed harvests, which in turn starved food-processing SME units and ravaged transportation networks that disrupted delivery of goods to markets, driving many SMEs out of business.

SMEs often rely on small suppliers who cannot weather climate-related disruptions, increasing their vulnerability.

A Difficult Transition

Climate-related resource scarcity can inflate prices of inputs like crops, metals and energy, damaging SMEs with thin margins. For instance, in 2020, Arabica coffee prices surged by over 20% as production dived in India and other coffee-producing hubs, hurting SMEs in the supply chain, like roasters and exporters, who could not pass on the higher costs to consumers.

Disruptions caused by climate change also drive up insurance, transportation, shipping and storage costs eroding the margins of SMEs.

Stringent government regulations to contain climate change like carbon taxes, emission limits and reporting, affect sourcing and transport of goods, burdening smaller businesses with limited resources.

For example, the ban on single-use plastics forced packaging, food processing and retail SMEs to invest in expensive alternative packaging materials. Many small businesses struggle to adapt to new regulations or cater to the growing demand for transparency and sustainability in supply chains from customers and large businesses due to lack of awareness and resources.

Larger companies baulk at working with SMEs not aligned with sustainable practices, leading to loss of business opportunities and damage to existing partnerships. Tata Motors, for example, has raised the sustainability bar for its supply chain partners, which may see the exit of several auto component makers without the resources to adopt green practices from its supplier network.

Thus, while climate risks have a profound impact on SME supply chains by disrupting operations, increasing costs and creating regulatory challenges, they also present opportunities for SMEs to innovate, adopt sustainable practices and build resilience.