Stakeholders can help Small and Medium Enterprises (SMEs) become disaster ready

The United Nations Office for Disaster Risk Reduction (UNDRR) launched a new report this week to support small and medium enterprises (SMEs) in being disaster-ready. The report titled, Increasing SME uptake of disaster risk reduction: recommendations for policymakers, financiers and the broader business community appeals to relevant stakeholders to take actions that not only support SMEs, but promote overall resilience and mutual benefit.

Policymakers, financiers and the broader business community can enable more widespread adoption of DRR practices by SMEs, the authors write. In particular, this can be done in a way that creates mutual benefits to SMEs and these other stakeholders, including through increased supply chain resilience, reduced counterparty risks, and more rapid, sustainable or inclusive economic development. A concrete example would be a large automotive manufacturer who relies on an SME for specific car part. By supporting the SMEs resilience, the manufacturer simultaneously strengthens their own supply chain.

SMEs, which generally have less than a few hundred employees, are crucial to the global economy, providing 50% of gross domestic product. They are also frequently a source of employment and livelihood for the worlds most vulnerable people. However, compared to larger businesses, SMEs are not only less likely to prepare for disasters, they are also much harder hit by them. Bearing about 75% of business losses, SMEs are significantly more affected by disasters than a larger business. The reports authors write, For example, yield losses from droughts are around five times larger for smallholders than they are for commercial farms exposed to the same event.

Rather than investing in advance preparation, SMEs tend to be reactive in the face of disasters. This could means laying off staff or selling capital assets after a disaster. However, this kind of response often leads to higher overall losses as well as slower recovery time.

Pulling together evidence from case studies, stakeholder interviews, a workshop and some bespoke modelling, the report found four main reasons SMEs hesitate to invest in DRR, including a) lack of access to finance, b) lack of resilient business models, c) inefficient business contracts, and d) lack of prevention-focused business continuity planning, which outlines how a business will operate during an unplanned disruption in service.

Policymakers, financiers and the broader business community are well positioned to support SMEs given their regulatory and financial capacity, expertise and robust networks. There are a number of potential entry points where these three stakeholders can support SMEs in ways that offer spillover benefits.

Foremost, governments can have a particularly strong impact on SME resilience. Some report recommendations include:

1. Kickstarting the market for financing DRR by increasing public and concessional finance, removing regulatory barriers to private finance, and enhancing the capacity of local financial institutions to appraise DRR investments.
2. Encouraging the adoption of resilient business models by providing supporting infrastructure such as telecommunications, enhancing SME capacity and awareness, and supporting SMEs to diversify geographically.
3. Promoting more efficient contracting models by addressing power balances, for instance through low-cost dispute resolution, and improving SMEs capacity to understand contracts and bargain collectively.
4. Supporting business continuity plans, which offers a relatively low-cost way of implementing risk prevention measures.

Meanwhile financial institutions and larger businesses can both have important roles. Financiers can link lending incentives or insurance premium payments with established DRR practices. They can also create incentives that increase the likelihood of a creating a business continuity plan. Likewise, larger businesses can promote SME resilience by encouraging their suppliers to adopt business continuity plans; they can also share best-practices, support with capacity-building and provide contractual incentives.

The authors conclude by recommending pilot projects implemented by UNDRRs private sector ARISE initiative, with support from the aforementioned stakeholders. Such pilots would show how the reports recommendations can take root in various contexts.