Adapting to climate risks ‘hidden’ in company value chains requires new approach says new research

Adapting to climate risks ‘hidden’ in company value chains requires new approach says new research

By Laura Canevari

There is an evident weakness in current private sector adaptation responses: they fail to incorporate adaptation measures taken by others into their strategic planning, and miss a range of risks and opportunities embedded in business networks operating at transboundary scales. New research done by researchers at King’s College London has found that by establishing a greater awareness of wide value-chain impacts and working collaboratively to share resources and manage risks, the private sector can adapt more efficiently, and greatly increase its resilience to climate change. This is likely to have far reaching impact as it is widely acknowledged that the private sector plays a crucial role in in fostering climate action and addressing the adaptation investment gap. In response to the recommendations of Task Force for Climate Related Financial Disclosures (TCFD), companies and financial institutions have started to evaluate climate risks and opportunities to adapt to a changing climate. Whilst researchers and scholars have started to investigate how businesses’ internal capabilities may shape adaptation responses, little is known about the influence of value chain relationships on businesses’ adaptive behaviours. Yet no business adapts in isolation: they do so within a context of interactions and interdependencies forged within their operational environment. What’s more, many of the skills and knowledge needed in order to adapt extend beyond traditional organisational boundaries.

This new research looks at agricultural value chains in Jamaica, understanding the importance of managing business relations strategically, and demonstrates the need to better allocate resources in order to build climate resilience along value chains. By mapping all the material, financial, and information exchanges amongst actors in three agricultural value chains, this research reveals how business-to-business interactions – as well as the structure of whole value chains – can influence actors’ adaptive behaviours and capacities.

Business networks generate constrains and opportunities that affect the adaptive behaviour of firms

Investigations of adaptation responses to drought in agricultural value chains in Jamaica (access resources at the end of this article) show that business network dynamics can impact on network sensitive elements of the exposure, sensitivity, and adaptive capacity of businesses. Actors are sensitive to the adaptation responses of their partners, depending on how much they rely on the critical resources that these partners hold. For example, value chain actors that rely on water utility providers and lack access to private wells or lakes are highly sensitive in times of drought. These water utility providers will impose water restrictions and rationing schedules that can increase the costs of production, potentially disrupting value chain operations.

Similarly, the research finds that the terms of contractual arrangements can strongly limit the ability of businesses to transfer or share climate risks, which changes their exposure to climate impacts. Most farmers in Jamaica do not have formal contracts with agricultural processors, and are therefore able to respond to the effects of droughts on their crops by increasing the price of their raw produce (hence transferring the risk). Processors, however, tend to have fixed price agreements with retailers, exporters and distributors. This means that, in times of drought, farmers can increase the price of the raw produce, whilst processors will have to absorb the increases in the price – even to the extent of having to cut down production in order to cope with the impact.

But the effects of network dynamics on business adaptation are not wholly negative. Businesses can draw on the strategic relationships that they have with others in their network to access valuable resources for adaptation, such as information and investment capital. In the cassava value chain in Jamaica, for example, it was found that processors can act as reliable providers of information or financial resources for small farmers they trust and with whom they have developed strong relationships. This increases the chances of access to capital for adaptation for small farmers, which is particularly important when other potential sources of capital (e.g. bank loans) are not available.  Businesses can also engage with their customers and suppliers in joint problem solving. By managing the decision-making process in this collaborative way, workable solutions can be developed more efficiently, which is of particular benefit in times of environmental turbulence. Collaborative problem-solving can expose hidden risks, and help developing management strategies for them, reducing the uncertainties experienced in the longer-term.

The level of resilience of value chains can also influence the capacity of individual businesses to adapt

In order to better adapt to a changing climate, it is not enough for individual businesses to forge and sustain strategic relationships with their direct partners. Businesses’ adaptation is also affected by how these partners manage their relationships with others. This means that the ways in which entire value chain networks are structured can influence value chain resilience and the adaptive capacity of individual actors. In fact, value chains that are more resilient tend to display greater levels of connectivity, collaboration and information sharing, which makes them more agile to respond to change. They also have the ability to re-engineer themselves by being both flexible (i.e. able to take different paths to respond to a disturbance) and preserving redundancies within their business functions (such as having multiple and backup suppliers and safety stocks). These network characteristics also enable individual actors to better adapt to a changing climate. However, they may also generate trade-offs; for example, between building redundancy and efficiency, or between consolidating core capabilities for competitive advantage or developing new ones for adaptation.

With the use of value chain network analyses, it is now possible to inform the design of value chains in order to increase their climate resilience and support the adaptive capacity of value chain actors. For example, the network structure of resource flows can be investigated, in order to understand how resources are exchanged between value chain actors, which actors hold critical positions within the network, and what levels of diversity and redundancy the whole network holds. From a government perspective, this information can be used to inform and justify the allocation of resources for value chain development.

Network analyses have also been used to demonstrate how business associations can improve information sharing, helping to promote greater value chain climate resilience and positively influencing actors’ adaptive capacity. In Figure 1 below, a representation of the cassava value chain network illustrates how different categories of actors currently interact in the exchange of different resources (i.e. information, material and financial resources), and how diverse the cassava value chain is in terms of type of key actors holding the network together. Each circle represents an actor, and the links between them show the resource flows between them (material, financial and information). The map is generated using a software called Gephi, which determines the spatial location of actors according to the level of attraction between the links to eachother. We can see in this diagram that a lot of the lines are yellow. These yellow lines are showing the resource flows among actors in the promoters group (an industry cluster composed of different value chain actors that work collaboratively to promote value chain development). In Figure 2, we see what the resource flows look like for information in this network. This figure shows the information network and how it changes with and without the presence (and connections) of the promoters group. When examined quantitatively, analyses show that the presence of this group increases the overall level of connectivity of the network in a number of ways: first, by increasing its overall density; second, by lowering the average path length of the network (i.e. the number of steps information needs to make in path between any two actors); and third, by reducing the network’s modularity (a measure used to understand how fragmented the network is into smaller sub-groups). This means that actors are more capable of accessing relevant information that may guide their adaptation practices when the promoters group is active, than when it is not.

Figure 1. Diagrams showing the information, material and financial flows in the cassava value chain, and the relative importance of different stakeholders and exchanges.
Figure 2. Diagram showing the difference in network connectivity with and without the presence of the promoters group.

A relational view of adaptation in the private sector can enrich our understanding of cross-scale interactions and transboundary climate risks

What makes the identification and management of climate risks increasingly challenging is the proliferation of business models promoting greater interdependency between actors located in different geographies. This facilitates the transmission of climate impacts across boundaries to completely different parts of globe and to completely different populations. The lack of appropriate climate frameworks enabling transboundary collaboration between institutions is caused, in part, by a shortfall in knowledge about how value chain network dynamics influence climate risk exposure and vulnerability at these transboundary scales. Developing relational approaches to study climate adaptation in the private sector can possibly play a role here. By assisting in the exploration and diagnosis of management problems at multiple scales, relational approaches can help to better characterize the dynamics that influence systemic risk. Furthermore, relational (or network-based) approaches offer tools to help appraise the complex connections between local (e.g. inter-sectorial) and transboundary factors affecting business vulnerability, by accounting for business constraints and enablers spanning beyond traditional organisational boundaries. Research in this area is still in its infancy, and more needs to be done to promote studies investigating the relational aspects of climate adaptation. Greater understanding of the role exerted by business relationships on adaptation will help decision makers to navigate the complexity of climate adaptation challenges and make the private sector more resilient to climate change.

This article is based on the research studies carried by Laura Canevari and peers at King’s College London. Free access available below.

Canevari-Luzardo, L. (2019). Climate change adaptation in the private sector: application of a relational view of the firm. Climate and Development. doi:10.1080/17565529.2019.1613214[

Canevari-Luzardo, L., Berkhout, F., & Pelling, M. (2019). A relational view of climate adaptation in the private sector: How do value chain interactions shape business perceptions of climate risk and adaptive behaviours? Business Strategy and the Environment. doi: https://doi.org/10.1002/bse.2375

Canevari-Luzardo, L. M. (2019). Value chain climate resilience and adaptive capacity in micro, small and medium agribusiness in Jamaica: a network approach. Regional Environmental Change. doi:10.1007/s10113-019-01561-0


Cover photo features photos illustrating key steps along the Cassava Value Chain in Jamaica. Photos by Laura Canevari

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