Source: The New Economics of Water Scarcity and Variability. World Bank, Washington, DC. © World Bank

By Juan Lacambra

SMEs are aware of the impact they generate to the environment, every day we note more companies applying clear policies of waste management or are looking for energy sources friendlier to the environment, moving away from green washing. However, few are focusing on the financial impact of climate & other environmental risks and/or opportunities in the organization. including their investments

The focus on understanding climate impacts on finances is key. There is a lot of work ahead to connect and strategically manage environmental related risks and, opportunities (including climate), integrated and mainstreamed with income statements, cash flow balances, investments, business portfolios etc.

The consequences of climate risks in a company should not only be assessed according to the impacts on the company’s fixed assets, but also their direct impact to the business’s cash flow -in revenues or costs- independently of the impacts on fixed assets.

For example: Floods and wind storms can impact a hotel´s fixed assets (infrastructure). The same hotel´s income may be affected because clients cannot reach the hotel due to landslides on access roads.  In the latter case, the hotel´s infrastructure is not affected, in simple terms the hotel stops receiving tourists and therefore income. In the first case the hotel may have insurance that covers its infrastructure, but in the second case, what can the hotel management do?

Constantly we read about the need to generate climate resilience among SMEs. In order to achieve this, we must identify the impact of climate events on the companies´ finances and understand that for each economic activity such impacts are different, with the potential to generate losses and revenues. Three days of intense cold can ruin a floriculturist´s harvest, in the Bogota savanna, while the same event could benefit a thermal clothing retailer.

The World Bank Report Uncharted Waters: The New Economics of Water Scarcity and Variability indicates that a single cut of water supply to an urban enterprise can reduce its income by more than 8 percent. And in the case of informal companies, as are many businesses in the developing world, sales decrease by 35 percent, leading to economic ruin and stagnation of economic growth in urban areas.

As an entrepreneur or manager of an SME, the first question that must be asked is: have I identified the climatic risks in my economic activity? Am I including the climatic uncertainty within the planning of my company?

Invest a few hours of your time, visualize the cash flow of your business and examine what climatic impacts could generate a decrease or increase in your income and how it would affect the expenses of your company. It is the first step to start adapting your company to climate change.

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