Emerging Economies Climate Report 2023

This article provides an in-depth summary of our Emerging Economies Climate Report 2023 – you can read the full version here.

The climate emergency is having a devastating impact on emerging economies. Without decisive action, this will only become more severe as global temperatures rise and as countries transition toward net zero.

At the same time, the technologies and business models driving the net zero and resilient transition are the growth story of the 21st century. The benefits of this green growth have the potential to deliver prosperity to emerging and developed economies alike.

Responding to climate change risks and opportunities requires scale of action. It also requires urgency as global temperatures continue to rise. 2023 was a record-breaking year at 1.48°C above pre-industrial levels.

Emerging economies are among the nations most exposed to and the least prepared for the effects of climate change. This is particularly the case across Africa, South and South-East Asia, and the Caribbean, where we invest.

Our Emerging Economies Climate Report, first published in 2021, aims to show how the climate emergency is affecting companies, how they are responding, and how investors can better support companies as we move together to a greener future.

The report provides an annual source of insights and data for investors. At BII, it helps us work together with our portfolio to address climate-related risks and maximise opportunities in emerging markets.

This year we once again surveyed senior executives working across our portfolio of companies and funds in Africa, Asia, and the Caribbean. The research was funded by our technical assistance facility, BII Plus.

Since we published our 2022 report, the challenges that climate change presents have become clearer, as have the approaches we need to take to meet these challenges. So, 12 months on, what has changed for the companies and funds in our portfolio?

The 2023 results show a broad increase in the impacts of climate change relative to 2022. They show how climate change is becoming an increasingly significant concern for businesses and investors in emerging economies. They also highlight the difficult decisions climate change is presenting firms, as well as what they need to effectively manage climate risks and realise potential opportunities of the transition.

Climate change is impacting more firms.

• 79 per cent of respondents said climate change is impacting their organisation today, an increase from 68 per cent in 2022.

A majority of respondents have experienced acute physical risks.

• 59 per cent of respondents have experienced an extreme weather event (for respondents specifically from corporates, this figure rose to 72 per cent).

Flooding, drought, and heat are the top physical risks.

Concerns about climate-related risks have increased.

• 87 per cent of respondents agreed to some extent that they were concerned about physical climate risks – up from 70 per cent in 2022.
• 73 per cent of respondents agreed to some extent that they were concerned about the risks associated with a low-carbon transition – up from 66 per cent in 2022.

More respondents are concerned about climate change affecting business growth and viability.

• 61 per cent thought climate change will affect the viability and growth of their business in the next five years. In our 2022 survey, 56 per cent thought climate change would affect the viability of their firm in the next five years.

More respondents agree that climate action leads to more long-term business success.

• 97 per cent agreed to some extent that organisations that take steps to reduce their carbon emissions and reduce vulnerability to physical climate change risks will be more successful in the long term – up from 91 per cent last year.

Most respondents have adapted their business strategy in response to climate change.

• 65 per cent have adapted their business strategy and 47 per cent have adapted their financial planning in response to climate change – down slightly from 69 per cent and 52 per cent in 2022, respectively.
• The most common strategic approaches are to exclude certain investment types or to offer green or climate-friendly products.

And an increasing number plan to adapt their business strategy.

• Although there is a slight decrease in those who have actually adapted their business strategy compared with last year, more are planning to do so.
• 17 per cent have plans to adapt their strategy in response to climate change, up from 2 per cent in 2022.

More respondents are calculating their carbon footprint.

• 45 per cent of respondents are calculating their carbon footprint, up from 38 per cent in 2022.
• Of these respondents, 23 per cent have set GHG emissions reduction targets.

Almost all respondents agree that targeted investment is needed to reduce climate exposure.

• 98 per cent of respondents think better investment is needed to help transition to net zero or become more climate resilient, up from 92 per cent in 2022

Our report explores these findings in more detail and below we share a summary. First, we focus on how climate change is impacting businesses. Next, we explore how businesses are responding, and finally, we provide an update on what businesses need to better manage the risks and seize the opportunities they face.

What types of physical climate events are affecting businesses?

Flooding and drought continue to be the physical climate events impacting firms the most. When comparing the results to last year (2022), the trend remains consistent, with the same top three physical climate risks identified in the following order of priority: flooding, drought, and extreme heat.

A total of 47 per cent of respondents ranked flood and drought risk in their top three present physical climate risks, while 43 per cent ranked extreme heat in their top three risks.

“Flooding is biblical… Flooding is huge… if [rice] overflows with too much water, it’s a problem.”

Okey Nwachukwu, Coscharis Farms

Concerns about physical and transition risks have increased

In addition to asking respondents how climate change is impacting their firm today, we asked respondents how concerned they are about climate change.

A total of 87 per cent of respondents agreed to some extent that they were concerned about physical climate risks – up from 70 per cent in 2022.

A total of 73 per cent of respondents agreed to some extent that they were concerned about the risks associated with a low-carbon transition – up from 66 per cent in 2022.

Firms in emerging economies face considerable challenges. To grow, they must navigate a complex and shifting socio-political landscape in a sustainable way, reducing climate impacts and building resilience to climate risk.

Firms in emerging economies are often confronted by a host of additional pressures associated with the impacts of climate change, despite most of these economies having done little to contribute to it. That means they need support to improve their climate resilience and ensure their success in the long term.

Our research, primarily from the qualitative views of the respondents and interviewees, uncovered four areas where firms in emerging economies expressed the greatest need for support:

• Training is needed to build awareness and capacity to act on climate change
• Targeted technical assistance will help firms act more accurately in key areas
• Targeted funding and more investment are needed
• Policy and regulatory conditions will drive more effective climate action

“There is a cost that can make transitioning challenging. A smaller hospital providing healthcare in a rural area can’t afford the upfront cost of solar… The current frameworks and industry papers make it challenging for smaller SMEs to adopt. Yet we all want to contribute, but running a TCFD-grounded process is not always feasible and running a sub-set may not be considered acceptable.”

Survey respondent

This research highlights that climate change impacted more firms in emerging economies in 2023 than the already high levels of impact seen in 2022 and 2021. In addition to more respondents actually experiencing physical climate change, concerns about both physical climate risks and transition risks have increased.

Respondents are also concerned about how climate change will affect business growth and viability. However, almost all respondents – 97 per cent – believe that the right climate action will lead to long-term business success.

The urgency of the climate challenge – and the rate of change in sustainability legislation and practices – means that firms, including those in emerging economies, are building skills and approaches to tackle and respond to climate change.

Encouragingly, progress continues to be made in managing climate impacts in certain areas. A majority of respondents have adapted their strategies in response to climate change and a growing number of respondents are planning to follow suit. There has also been progress in respondents measuring and managing carbon emissions, with 7 per cent more calculating their carbon footprint when compared with 2022.

Yet there’s much more work to be done. The findings of this survey show businesses have fundamental concerns about flooding, drought, and heat, but despite this, most are not yet financially planning in response. In many cases this is because they lack the necessary knowledge and resources. This highlights an opportunity for investors of all types to step up their support, not just because of the development impact of climate mitigation and adaptation-focused investing, but because it protects financial return.

Institutions like BII play an important role in supporting businesses in emerging economies as they respond to climate change. We will continue to monitor the views of our partners so that our approach supports economic transformation, a just transition to net zero, and the resilience of our portfolio in the best and most targeted way possible.

Read the full report

This year’s report was funded by our technical assistance facility, BII Plus.