MSMEs & climate cause

DVR Seshadri | Updated on July 01, 2021

This segment needs to come on board quickly

There is increasing evidence that climate change poses severe risks for Micro, Small and Medium Enterprises (MSMEs). MSMEs contribute 30 per cent of GDP and are the largest employers after agriculture.

According to the GHG Platform India, industry contributes about one-fourth of total GHG (Green House Gas) emissions of the country.

Infrastructural damage, regulatory uncertainties, financial risks, market fluctuations, supply chain disruptions and reputational damage are some of the potential risks posed by climate change to businesses. However, there is a strong business case for corporate climate action.

Mahindra, Tata, and Dalmia, among others, have catalysed wider discourses around climate action, with many others committing to “net-zero” and “carbon negative” goals, over the next decade.

High investments

However, climate action involves high initial capital investments in renewable energy, technology replacements for energy efficient measures, waste and water treatment systems, etc. While large corporate houses have the financial muscle to invest in these areas , MSMEs are confronted with several financial constraints. Limited awareness and technical wherewithal, unsupportive regulatory regime, and complex environmental norms create further challenges for MSMEs.

Environmental regulation impose an unfair financial burden on MSMEs. Offending industrial units are often unaware about the environmental consequences of their processes or lack the institutional support to implement climate-smart interventions.

The depleting stock of fossil fuels and other raw materials and the associated escalating prices pose operational risks to MSMEs making it crucial to switch to cleaner fuels and resource-efficient practices.

For MSMEs, a facilitative regulatory frameworks with incentives could include:

(1) Increase access to climate finance at low cost to help MSMEs adopt climate-smart technologies and measures quickly. The recently sealed pact between the European Investment Bank and SBI, promises to provide €100 million into equity finance for small businesses focused on climate change and is expected to encourage MSMEs to implement innovative, climate friendly alternatives.

(2) Leverage the training and advisory services of organisations such as the CII-ITC Centre of Excellence for Sustainable Development to identify material issues across Environmental, Social, Governance (ESG) dimensions. This will help MSMEs to prepare respective comprehensive frameworks that are commensurate with reporting frameworks such as Global Reporting Initiative (GRI), Business Report & Sustainability Report (BRSR), etc.,

(3) Tailor policies and regulations to create incentives for MSMEs to participate in the SME Climate Hub, a global initiative that has been launched as a one-stop-shop for SMEs to cut carbon emissions and build business resilience. Nineteen Indian MSMEs have committed to science-based targets for climate action, till date.

(4) Create synergies between state governments, industry associations, and larger enterprises to establish sector-specific eco-industrial parks.

The opportunities of adopting a low-carbon path are immense for businesses of all sizes.

To their advantage, MSMEs are not as complex as large corporations, making it easier for them to pivot to low carbon processes and products, and do so at significantly lower costs.

Thanks to the ‘Covid wake-up call’, it is time to reboot and reinvent.

Winners among MSMEs would be those who heed to this clarion call proactively, rather than reactively.

Gorti is Senior Research Manager, IFMR; Mahanti is Research Associate, ISB; and Seshadri is Clinical Full Professor of Business - Marketing Area, ISB

Published on July 01, 2021

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