Financing the Green Transition – Strengthening of Micro, Small and Medium Enterprises in a Post Pandemic World

Zeenat Niazi | April 1, 2021 | Leave a Comment Download as PDF

This article appeared first on Alternative Perspectives on January 14, 2021.

Micro, Small, and Medium Enterprises (MSMEs) are at the heart of the Indian economy, with significant contributions to national GDP and employment. The Sustainable Development Goals (SDG) framework brought the fundamental role of MSMEs in local and national development to the centre stage.

Government too has focused on the business stability and financial sustainability of MSMEs as a priority in the national development plans including giving the sector a special focus in the post-pandemic economic revival strategy in 2020.

Business stability and sustainability of MSMEs do not necessarily indicate their ecological performance and responsibility. Despite their high social and local economic indicators, the environmental performance of MSMEs is questionable and their vulnerability to climate change impacts and natural disaster events remains high. This is not only in the case of units involved in manufacturing and in primary sectors, but even in many MSMEs in the waste management and recycling sectors which are generally perceived as green. Although at the individual level their ecological impacts are small, the sheer numbers make the total volume of impacts significant. This was evident in the recent pandemic-induced lockdown when incredible air and water quality improvements were observed in locations that had high densities of small-scale manufacturing units. It is in this light that we need to reflect on the MSME focus in India’s post-COVID economic recovery package.

In recent times, finance is seen as a key lubricant to drive MSMEs towards greener, climate-responsive, and circular business models. This is a nascent space and there are multiple challenges at both the demand and supply end of finance. Capacity gaps exist at the end of MSMEs, especially in their abilities to formulate business plans that reflect the value of green and inclusive parameters in their bottom lines. At the same time, the financial services ecosystem is not ready with the right products, instruments, delivery systems, and enabling policy and market environment.

The resource efficiency, circular economy, and climate mitigation potential that may be unlocked through MSMEs can only be realized with a shared understanding of the needs as well as of the constraints of the different related stakeholders. The pandemic has given us an opportunity to rethink the relationship of the macro with the micro; of large financing infrastructure, institutions, and regulatory frameworks to respond appropriately to the need and challenges of the large numbers of small-scale and decentralized businesses.

Key stakeholders, especially MSMEs, financing institutions, and regulatory bodies need to co-design financial frameworks, instruments, and products for enabling MSMEs to go green. Think-tanks and civil society organizations can play a vital role here in providing a neutral space for dialogues to build a shared understanding regarding the taxonomy, frameworks, and parameters for green finance for MSMEs. This can go a long way in helping co-create appropriate financial products and instruments. Civil society can further play a key role in piloting and testing new products with local micro-enterprises, extending ecological and financial literacy to the entrepreneurs, and tracking the impacts of green finance for MSMEs.

Going forward, India’s recovery package for the MSMEs will be judged not only by cumulative financial returns of the sector but also by the environmental and social benefits accrued to society. Green transition in the sector will be assessed not just by the macro-shifts engineered but also by local benefits accrued to the multitude of micro and small enterprises, women, and vulnerable populations as well as the contribution to local water, air, and soil quality improvements and the rejuvenation of local ecosystem services made possible through local businesses.

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