The private sector in Spain, lost in climate change adaptation

The private sector, key for economic and sustainable development

According to the last report of the Spanish Central Directory of Companies (Directorio Central de Empresas — DIRCE) on small and medium-sized Spanish enterprises (SME)[1], there were 3.4 million enterprises in 2021, 99.9% of them where SME (with less than 250 employees), while 0,1% where big companies (with more than 250 employees). SME offer jobs to more than 10 million inhabitants in Spain, constituting an important engine for the Spanish economy.[2] At the global level, these companies generate about 50% of the GDP and about 60–70% of the employment.[3]

While SME constitute such an important part of our economic system, auditing non-financial reports and being engaged in ESG projects with the private sector in Spain, one can find a clear evidence that many of these SME are not ready to adapt to climate change.[4] In fact, the large-scale and long-term nature of climate change makes it uniquely challenging, especially in the context of economic decision making. Accordingly, many organizations incorrectly perceive the implications of climate change to be long term and, therefore, not necessarily relevant to decisions made today.[5]

“Most SMEs in Spain are not ready to adapt to climate change.

Why some Spanish SMEs are not yet climate change-proof?

First and foremost, there is a considerable knowledge and awareness gap in what is climate adaptation and the importance to adapt. Many Spanish SME are not aware of the risk they will face in the future, while they simply state that their activities are not directly impacted by climate change. Some SME report that the only impacts they will face is an increase in prices (of fossil fuels and raw materials). This contrasts with the situation at larger and listed companies, where greater and increasing efforts are seen in their reports as they face greater demands from the investors and international laws.[6]

“Many SMEs are not aware of their exposure and risks to climate change.

Stakeholders have been trying in the last couple of years to raise awareness about the importance to detect their risk exposure as well as to implement some climate adaptation initiatives in their sector. One clear example is the communication of the future approval of a Royal Decree (before May 2023) on development of Article 32 which will make mandatory the application of the 7/2021 Law on climate change and energy transition in Spain. The implications of this law will force companies to have a more in-depth study of climate change impacts and adaptation and other related assessments, including climate risk and opportunity assessments, which cannot be properly done in few days. While SME should start preparing, we still find that there is not much action from them, as seen while auditing their non-financial statements and talking with the representatives of each of the companies.

Second, a lot of SME confuse climate adaptation with climate mitigation. In several cases, while verifying the data from the reports being audited, we found sections titled climate adaptation and mitigation that solely focused on actions that mitigate climate change, while the difference and the implications of these two concepts are considerable. In simple terms, climate mitigation involves all activities that aim at reducing the carbon footprint, which includes measures to reduce the CO2 emissions from energy consumption and business travel, to increase the consumption of renewable energy relative to non-renewable energy and to implement energy efficiency measures, among many others.

On the other hand, climate adaptation are all those measures that anticipate and prepare for the consequences of climate change, taking advantage of the opportunities it presents, while avoiding or diminishing the negative impacts. In this sense, climate adaptation measures include disaster preparedness protocols (disaster response mechanisms to avoid or lessen the negative impacts from drought and floods), climate risk assessments before deciding the location of a company, installation of rainwater tanks, green roofs to reduce the temperature and protect the biodiversity, insurance to protect companies against climate risks, and a huge et cetera of actions that are less costly to adopt now.

“Climate change adaptation and mitigation are confused by many of these companies.

While reading non-financial statements one can see many efforts across companies to reduce their carbon footprint increasing their renewable energy consumption, implementing energy efficiency mechanisms and planting trees to offset their carbon footprint (and many others, depending on the sector), climate adaptation is being left behind. Moreover, despite these efforts, many of the SMEs in Spain don’t have carbon reduction targets set, while they mostly don’t have enough resources to calculate scope 3 emissions. These seem to imply that they do not really have a well-set plan to follow and reduce their carbon footprint.

The risks of inaction affect the economic survival of SMEs that do not adapt to climate change

Not adapting to or acting against climate change exposes these firms to a series of risks, apart from the ones that can get from the impacts of climate change itself (physical risks). According to the 2017 final report of the Task Force on Climate Related Financial Disclosures (TFCD)[1], companies may face the following risks:

1. Policy and legal risks: policy risks refer to the risk of facing bigger financial burdens from green policies, for example, whereas legal risks refer to the risk of receiving litigation claims due to failure of the organization to mitigate impacts of climate change, failure to adapt to climate change, and the insufficiency of disclosure around material financial risks.

2. Technology risks: adopting lower-carbon and energy-efficient technologies creates a competitive advantage to companies as they get less distribution and production costs. Companies that do not or cannot adopt these technologies, may be displaced from the market.

3. Market risks: this refers to shifts in supply and demand of certain products, commodities and services arising from climate-related risks and opportunities.

4. Reputation risks: this risk refers to changing customer or community perceptions of an organization’s contribution to or detraction from the transition to a lower-carbon economy.

Recent trends to advance climate adaptation in SMEs

On the other hand, there is another trend that is increasingly growing: companies are hiring now more sustainability or ESG consultants as a 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 matters with those that do have professionals (with expert knowledge) in charge. The last ones usually have more projects and a higher control of environmental-related information.

Finally, thanks to the new national and European laws that will soon be approved, such as the Directive on corporate sustainability due diligence and the Corporate Sustainability Reporting Directive (CSRD), more companies will incorporate experts in sustainability as part of their workforce and more action will be seen in the private sector in the years to come. Those companies that will not manage to adapt and respond to climate change in time, will not only reduce their future corporate benefits but may be even displaced from the market.

Conclusions

SMEs play a great role in the Spanish economic system, yet many of them are not adapting to climate change to date. Some of the reasons that explain this is the lack of awareness of the importance to adapt to climate change and the knowledge gap in the risks that their operations will face. Not adapting to or acting against climate change exposes these firms to a series of risks, apart from the ones that can get from the impacts of climate change itself (physical risks).

On the other hand, sustainability laws that target companies and organizations are important elements to accelerate climate adaptation and sustainability in companies’ operations. In fact, an increasing number of companies are hiring now more sustainability or ESG consultants as a part of their workforce, creating new sustainability departments and, hence, increasing their climate action.

Those companies that do not manage to invest in time in climate change adaptation and mitigation, will not only struggle financially for the risks involved, but they may even be displaced from the market.

Acknowledgements

I would like to acknowledge Antonio Capella Elizalde and Sergi Arnau Castel for their inputs in this article.

References

[1] Retrato de la PYME. DIRCE a 1 de enero de 2021 — COLECCIÓN PANORAMA PYME 14 (ipyme.org)

[2] Cifras PYME. Datos mayo 2022 (ipyme.org)

[3] Micro-, Small and Medium-sized Enterprises Day | United Nations

[4] The sectors audited do not include the agriculture sector

[5] FINAL-2017-TCFD-Report.pdf (bbhub.io)

[6] Fourth TCFD Status Report Highlights Greatest Progress to Date on TCFD Adoption | Task Force on Climate-Related Financial Disclosures (fsb-tcfd.org)

Información Financiera VS Información no Financiera: cuestión de madurez (ey.com)

[7] https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf