How ERM can help MSMEs reduce climate change risks

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Climate change is a vast, complex and evolving subject. Generally speaking, it refers to long-lasting changes in weather and temperature, which increase the risk of phenomena such as extreme weather and global warming. Unlike other environmental issues, climate change is unique because of its global and long-term nature, its irreversibility, and the uncertainty associated with assessing its course and impact.


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The main impacts of climate change include an increase in natural disasters such as floods, storms, droughts, wildfires, heat waves and rising sea levels, some of which are already happening around the world . Not only do these phenomena adversely affect human health, but they also endanger livelihoods and disrupt the global supply chain, ultimately impacting economic growth.

MSMEs are particularly vulnerable to the threat of climate change, due to their size and financial situation, and any negative impact on this sector affects the Indian economy as well as livelihoods. Their vulnerability has already been demonstrated by the COVID-19 pandemic, which has left the sector deeply in debt with 71% of MSMEs unable to pay their workers’ wages in March 2020.

The MSME sector contributes 30% of the country’s GDP and employs around 60% of the national workforce. However, these companies are relatively small and lack access to the kind of resources enjoyed by large conglomerates and multinational corporations (MNEs). If the supply chain is constrained for whatever reason, MSMEs face a greater risk of business continuity because they do not have the same extensive networks of suppliers and other service providers as global companies. In addition, as investors increasingly consider environment, social and governance (ESG) as a key aspect when evaluating potential investments, MSMEs seeking funding should ensure that ‘they have a clear plan for this, in order to build trust with potential investors.

Although the Corporate Responsibility and Sustainability Report (BRSR) is not mandatory for MSMEs, it is imperative that MSMEs prepare for climate change and its impact as a critical threat and take mitigation measures to avoid the type of pitfalls encountered due to the pandemic. Enterprise Risk Management (ERM) provides a holistic approach to risk management and considers a variety of risks, including climate change, which MSMEs can leverage to protect their businesses against an uncertain future.

How does ERM help MSMEs manage the impact of climate change to protect themselves?

ERM empowers MSMEs to assess the impact of climate change on their business and develop a program that cost-effectively mitigates material risks, helps make evidence-based decisions, seizes opportunities and tracks progress . It provides a proven approach to life cycle assessment, helping them to more effectively manage environmental factors and emissions throughout the product value chain.

Adopting ERM helps MSMEs assess their exposure to climate change issues, both operationally and financially, to model a range of scenarios and disclose these results to investors.

RAM helps MSMEs look at the broader supply and value chain. Raw material sourcing, product design and launching into new markets can all be impacted by climate change. MSMEs need to ensure that not only individuals pass the global warming test, but also their whole brand.

ERM also encompasses knowledge of emerging vehicle and fuel technologies and provides tools to assess and find ways to reduce fleet-related emissions. It promotes efficient energy management, helps foster operational excellence and generate rapid energy savings. It also enables MSMEs to map the carbon risk in the geographical areas of activity in which they operate and gives them access to advice on policy and regulatory changes related to climate and clean energy, to help them align their strategies for complying with requirements.

The use of ERM helps MSMEs gain economic and financial knowledge to develop risk-based mitigation strategies, as well as develop risk assessments and response plans designed to protect them from physical risks of climate change throughout the supply chain. For MSMEs trying to secure financing or looking to grow or improving their governance, ERM helps to accurately verify and increase disclosure of current and emerging risks and opportunities to investors and others. main stakeholders.

ERM supports MSMEs by adopting a precautionary approach to environmental challenges and undertaking initiatives to promote greater environmental responsibility and encourage the development of environmentally friendly technologies and products.

The IRM Level 2 exam provides insight into enterprise risk management and how to protect your organization against climate change risks.

What are the key principles MSMEs should consider when developing a climate change risk management strategy

Guidance on Climate Change Risk Management by the IRM Climate Change Special Interest Group recommends some high-level principles that companies should consider when developing their risk management strategy related to climate change. They are:

  • It is important to identify threats and opportunities in order to develop climate-friendly products and services
  • The company should establish a baseline for the level of change and expected impact
  • Adapt their existing business models while developing new operating models
  • MSMEs need to review their business objective and assess their current business strategies.
  • Develop a strategy that aligns with external requirements and expectations

The world is increasingly aware of the need to reduce greenhouse gas emissions and mitigate the risks associated with climate change. Companies around the world have started to take advantage of new business opportunities by innovatively addressing the challenges of climate change. For MSMEs in particular, climate risks are not just about the environment – ​​they also pose a definite threat to their financial position and reputation. It is more important, now than ever, that MSMEs understand the importance of climate-related risks to their businesses and formulate strategies to turn risks into opportunities.