SMEs are the backbone of every economy: supporting their climate adaptation is vital
Small and Medium-sized Enterprises (SMEs) make up most economic activity but are particularly vulnerable to the extreme weather events made more likely by climate change. Dr Paola Sakai draws on her work on flooding in the Yorkshire region to show how understanding the economic losses of SMEs from such events and supporting cross-sectoral partnerships can be key to enabling SMEs to adapt.
Climate variations and extremes are already happening, and are set to get worse under current predictions. The second goal of the COP26 is adaptation, in order to protect communities and natural habitats in the face of the changing climate.
Small and Medium-sized Enterprises, or SMEs, worldwide make up around 97–99% of the entire private sector of almost every nation. If they are affected by climate related events, such as flooding, knock-on effects occur across the local and regional economies. To protect communities, it is important that we can mobilise and encourage SMEs to adapt.
Here I look at the specific case study of flooding in Yorkshire, the size of the damages, the efforts made to advance SMEs adaptation, and what actions are urgently needed.
Poor flood-resilience can cost SMEs in many ways
Flooding can destroy the assets of a company, but it may also bring disruptions in the supply chain, worker productivity, etc. All these interlinkages mean that if SMEs are affected by flooding, it can trigger a negative ripple effect. My research in the north of the UK revealed that in the Calderdale Borough the 2015 Boxing Day floods caused loses of almost £47 million, whilst the negative spill-over across the regional economy amounted to £179 million (Economic impact assessment of Boxing Day floods report).
And this was not an isolated instance. I found SMEs across the area have continued experiencing losses, with the 2019/20 flood incidents costing them around £65m (as reported in the Yorkshire Post). These incidents could exert a downward-spiral effect that can erode the character and vibrancy of towns and the well-being of their inhabitants. To avoid compromising the future development and prosperity of areas at increased risk of flooding, governments need to turn their attention to help build SMEs climate-resilience.
Understanding SMEs economic losses is paramount
SMEs are the most vulnerable sector to climate variations and extremes, however, the economic impacts and the adaptation measures that they can take are under researched. Current approaches to assess damages on small firms leave behind the nuances related to the size of the business and indirect impacts. SMEs have particular traits and needs — they are not ‘small versions of big businesses’. Having detailed information on the economic costs is crucial to encourage self-protection where it is most needed, and to target interventions as well as support.
As I outlined to the Environment Food and Rural Affairs Select Committee inquiry on flooding, many of the impacts from climate events are not always directly evident, such as disruptions in the supply chain. Such indirect impacts are rarely considered when assessing the extent of the losses. With this understanding, Local and Regional Authorities could develop more informed economic cases to secure investment to e.g. reduce flood risk where is most needed.
Similarly, a greater understanding of the losses that SMEs incur can help to move forward insurance as a risk management strategy. SMEs are more complex to insure than households or cars (which have more homogeneous traits, e.g. all cars have wheels), but this lack of understanding by the insurance sector generates uncertainty, which is reflected in increased insurance premiums, less favourable terms, or policy withdrawals for SMEs in flood risk areas (Sakai 2020). Those problems are particularly acute for the smallest businesses. For instance, for SMEs with 0–4 employees, the average costs of insurance would equal their average monthly sales. There is a genuine need to offer better and affordable insurance products to SMEs in flood-risk areas.
Cross-sectoral partnerships could be key to SMEs adaptation
The negative consequences on SMEs exert ripple effects in their communities, thus SMEs should seek to protect themselves, and their protection should be of interest to the wider community, local and national Government.
Cross-sectoral partnerships can be enablers of adaptation. As SMEs have explained to me, those in flood risk areas need insurance not only as a ‘personal peace of mind’, but also to access finance to expand their activities, get a mortgage, or just continue with their businesses. Insurance could be a driver for self-protection if it is tied to the take-up of adaptation measures and this is reflected in the price or conditions of insurance. The Government should seize the opportunity to establish a new joint partnership with the insurance industry focused on SMEs in towns at flood risk.
We have recently demonstrated what such a cross-sectoral approach can achieve at the regional level. Working with Local and Regional Authorities across Yorkshire and the Humber, lenders, insurers, brokers and surveyors, and iCASP as a funder of this initiative, we have co-produced two tools to help increase the flood resilience of SMEs:
- The first one, Tool to Assess the Economic Costs of flooding on SMEs (TAEC), seeks to increase the capacity of local authorities in Yorkshire and the Humber to carry out standardised economic assessments of the indirect and direct impact of flooding on SMEs in a consistent and timely way.
- The second tool, Tool to Assess the Effectiveness of Resilience Measures on SMEs (TAER), seeks to understand the effectiveness of resilience measures undertaken by SMEs, so that lenders, insurers, brokers and surveyors can improve their confidence that flood risk is properly managed by SMEs. This will allow them to offer more accurate insurance prices and products based on a better understanding of the sector’s risk.
The two tools have been piloted (see this short video summarising the results of the trial). With TAEC, local authorities in Yorkshire and the Humber were able to gain a more accurate quantification of the costs of flooding faced by SMEs. Participant SMEs stated that TAER is a clear and useful resource to increase their awareness, assess their own resilience and act. In addition, lenders, insurers, surveyors and brokers showed an increase in confidence in the SMEs’ attitude and willingness to protect their business, which opens conversation to unlock affordable protection.
Commenting at the launch of the final report Cllr Tim Swift, West Yorkshire Combined Authority’s Portfolio holder for Climate and the Environment said:
“This study is helping us better understand the needs of SMEs and improve our flood risk management strategy. This collaborative initiative is an important step towards our ambition to make West Yorkshire a place where everyone can enjoy the economic, health and environmental benefits of a net-zero carbon economy by 2038.”
Ian Gibbs, National Technical Manager at Sedgwick said:
“SMEs in high flood risk areas face a real challenge getting affordable flood cover. This project is key to helping insurers/brokers and SMEs capture and understand the effectiveness of the flood resilience that has been put in place, so decisions can be made with a detailed understanding of the flood risk.”
The tools developed showed that cross-sectoral partnerships can enable climate action and stakeholders at our final event emphasised this. Results of our study conclude that linking together both tools could generate even greater societal co-benefits. While the local governments and the insurance sector see the benefits, there is a strong need for the national government to support funding for public-private research and innovation partnerships at a regional level to enable a framework to advance SMEs flood risk.
What can we do to support SMEs become more flood-resilient?
Encouraging the creation of resilient SMEs is a worthy effort, because wetter winters and other pandemics and black swan weather events will come again.
Let’s take COP26 as an opportunity to re-think the urgent need to support SMEs flood resilience. The lessons learned and tools developed in Yorkshire could help Business Development Teams and Flood Risk Management Authorities of other Local Councils to automate and integrate SMEs flood financial losses to secure jobs and be climate prepared. National government agencies, such as BEIS and Defra, can mobilise financial support for regional public-private research and innovation partnerships that enable working together to better understand SMEs losses to encourage climate adaptation. This agenda can greatly contribute to achieving the COP26 goals of adaptation and collaboration.
Further information
The Boosting SME’s resilience project was led by Dr Paola Sakai, University of Leeds, supported by UKRI Economic and Social Research Council (ES/S001727/1), in partnership with Dr Marco Sakai from the University of York. The Yorkshire Integrated Catchment Solutions Programme was the main financing partner of this initiative (with UKRI Natural Environment Research Council grant), with further funding from the West Yorkshire Combined Authority and the Environment Agency. The Leeds City Region Enterprise Partnership, Sedgwick, GJB Consultancy, Upper Calder Valley Renaissance, Ambiental, and the Defra Task Force were also partners of this research.
