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No. 191 November 1, 2013 Strategy to Develop Frontier Markets with Emphasis on Adaptation to Climate Change Junji KOIKE, Tokutaro HIRAMOTO and Takanori IZUMI NRI Papers No. 191 November 1, 2013 Strategy to Develop Frontier Markets with Emphasis on Adaptation to Climate Change Junji KOIKE, Tokutaro HIRAMOTO and Takanori IZUMI I Effects of Accelerating Climate Change and Frontier Markets for Private-Sector Enterprises in Developed Countries II Wave of Adaptation Business Spreads among Enterprises in Europe, the U.S. and Emerging Countries III Beginning of Adaptation Business by Japanese Companies IV Steps to Develop Frontier Markets with Attention Placed on Climate Change limate change not only affects the global environment, as seen in the changes in ecosystems C and poor harvests that are caused by temperature rise, changes in rainfall patterns that lead to unseasonable droughts and heavy rains, and spread of salt damage caused by rises in the sea level, but it also has a major impact on society and the economy. Any response to these challenges will require the increased use of not only public, but also private funds. For private-sector enterprises in developed countries, business opportunities presented by adap- tive measures in response to climate change are found extensively in various sectors. For business operated in emerging and developing countries, an approach that takes in not only consumer mar- kets but also local governments and local companies is essential to expanding the scale of business and stabilizing earnings. From this point of view, it is possible to say that adaptive measures in response to climate change will come to form a major market in the future. Efforts to deal with adaptation business have also begun in Japan under the umbrella of the “2012 Study on Sustainable Contribution by the Japanese Private Sector to Developing Countries’ Adaptation Needs,” which is the feasibility study (FS) project undertaken by Japan’s Ministry of Economy, Trade and Industry. Specific examples include a desert greening system, climate adap- tive agriculture in salt-polluted areas and landslide prevention/mitigation business. An approach adopted for developing frontier markets with an emphasis on climate change should consist of six steps, namely, ① survey of trends in frontier markets by assuming solutions of social issues, ② analysis of a company’s strengths and weaknesses after breaking down busi- ness models and product specifications into elements, ③ rebuilding business models based on solutions, ④ alliances with diverse partners, ⑤ rapid establishment of a PDCA (plan – do – check – act) cycle and success models and ⑥ proactively publicizing results and effects. Copyright 2013 by Nomura Research Institute, Ltd. 1 NRI Papers No. 191 November 1, 2013 I Effects of Accelerating development. In the support provided from developed countries, support from private-sector enterprises, in ad- Climate Change and Frontier dition to that coming from the governments of those countries, would have a significant meaning. Markets for Private-Sector This is because, first, the governments of many devel- Enterprises in Developed oped countries are facing financial crises, and as such are finding it difficult to continue to increase the amount Countries of tax-funded direct aid that they provide. However, if private-sector enterprises were to approach these activi- 1 Effects of accelerating climate change ties as business opportunities and if such business and required adaptive measures reaches a profitability milestone, governments could be relieved of the financial burden and support could con- The widespread burning of fossil fuels such as coal and tinue to be offered through business activities by the oil has led to increased concentrations of carbon dioxide private sector. in the atmosphere, which, in turn, has accelerated cli- Second, private-sector enterprises in developed coun- mate change. This man-made climate change not only tries possess a variety of technology and expertise that affects the global environment, as seen in the changes in can be effectively used for adaptation to climate change. ecosystems and poor harvests that are caused by tem- The development of business related to adaptation to cli- perature rise, changes in rainfall patterns that lead to mate change by transferring such technology and unseasonable droughts and heavy rains and the spread expertise to emerging and developing countries will en- of salt damage arising from rises in the sea level, but it able those countries to establish a sound economic base also has a major impact on society and the economy. and will lead to the development of their economies. Developing countries, particularly those in Africa, Given this background, this paper focuses on adapta- where the reliance on primary industry is high and tion business by private-sector companies that is related where the infrastructure is poorly developed, are partic- to climate change caused by global warming. ularly vulnerable to the climate change that is caused by In this paper, adaptation business is defined as “cor- global warming. porate activities to operate business in the fields of A fundamental solution to climate change would be to adaptation to climate change by regarding social prob- reduce the emissions of carbon dioxide that are the lems that have arisen (or are highly likely to arise) as a cause of global warming, and so suppress any change. result of climate change in emerging and developing However, for those emerging and developing countries countries as business opportunities for Japanese compa- that are vulnerable to climate change, rather than apply- nies.” Therefore, in this paper, businesses that are ing such a radical solution, it would be more vital to classified as engaged in corporate social responsibility fully “adapt” to those changes that have already oc- (CSR) activities and those that are designed to provide curred and take necessary measures for adaptation in aid to emerging and developing countries are not includ- order to protect human life and stabilize the economy ed in the term “adaptation business.” and society. Most people would agree that the responsibility for 2 Frontier markets for private-sector supporting emerging and developing countries as they enterprises in developed countries adapt to climate change should fall on the shoulders of those developed countries that have continuously dis- For Japanese private-sector companies, business oppor- charged large amounts of carbon dioxide as a result of tunities related to climate change have presented their past industrialization and current economic themselves in many different areas, as listed in Table 1. Table 1. Fields of adaptation to climate change where private-sector enterprises in developed countries have strengths and examples of adaptive measures Fields of adaptation Examples of adaptive measures Agriculture, forestry Increasing yields in crop production and revenue, promoting agriculture with a lower environmental load and fisheries and developing highly climate change-resilient crops Water Supplying safe drinking water, and addressing water shortages Forest Dealing with and preventing desertification Health Preventing the spread of infectious diseases caused by climate change and providing medical treatment Energy Improving access to renewable energy Disaster preparedness Building society highly resilient to natural disasters such as flood and drought Education Providing education in adapting to climate change Strategy to Develop Frontier Markets with Emphasis on Adaptation to Climate Change Copyright 2013 by Nomura Research Institute, Ltd. 2 NRI Papers No. 191 November 1, 2013 For example, Africa is particularly susceptible to cli- II Wave of Adaptation mate change. By 2020, it is predicted that a maximum of 250 million people in Africa will face a serious shortage Business Spreads among of water, and water-dependent agricultural production Enterprises in Europe, the will drop by as much as 50 percent. Water purification technologies are a specialty of Japanese companies, U.S. and Emerging Countries which can provide the technologies needed for agricul- ture to make the most efficient use of limited amounts of 1 Proactive efforts by companies in rainwater. In addition, given the expertise that they have Europe, the U.S. and emerging countries accumulated through post-earthquake reconstruction and similar situations, Japanese companies possess the Companies in Europe, the U.S. and emerging countries technologies and expertise to build an infrastructure that have also begun to make proactive efforts for adaptation is resilient to natural disasters caused by climate change. business. Unlike other businesses, how to address cli- Thus, the business opportunities presented by climate mate change is an essential issue for the growth of change span a wide range of fields, which often can be companies in emerging countries. This is the reason seen in those business areas in which Japanese compa- why not only European and U.S. companies but also nies have a technical advantage. major companies in emerging countries have all begun In the future, as the effects of climate change in- to participate in this field. However, these efforts have crease, funding by governments and international only just begun, such that business strategy and methods organizations will continue to be directed toward adap- for business development have not yet been established. tation efforts. In addition, if climate change

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