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

Micro, Small and Medium Enterprises (MSMEs) are at the heart of the Indianeconomy, with significant contribution to national GDP and employment. The SDGframework brought the fundamental role of MSMEs in local and nationaldevelopment to centre stage. Government too has focused on the businessstability and financial sustainability of MSMEs as a priority in the nationaldevelopment plans including giving the sector a special focus in the post pandemiceconomic revival strategy in 2020.

Business stability and sustainability of MSMEs does not necessarily indicate theirecological performance and responsibility. Despite their high social and localeconomy indicators, the environmental performance of MSMEs is questionable andtheir vulnerability to climate change impacts and natural disaster events remainshigh. This is not only in the case of units involved in manufacturing and in primarysectors, but even in many MSMEs in the waste management and recycling sectorswhich are generally perceived as green. Although, at the individual level, theirecological impacts are small, the sheer numbers make the total volume of impactssignificant. This was evident in the recent pandemic induced lockdown whenincredible air and water quality improvements were observed in locations that hadhigh densities of small scale manufacturing units. It is in this light that we need toreflect on the MSME focus in India’s post COVID economic recovery package.

In the recent times, finance is seen as a key lubricant to drive MSMEs towardsgreener, climate responsive and circular business models. This is a nascent spaceand 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 formulatebusiness plans that reflect the value of green and inclusive parameters in theirbottom lines. At the same time, the financial services eco-system is not ready withthe right products, instruments, delivery systems and enabling policy and marketenvironment.

The resource efficiency, circular economy and climate mitigation potential that maybe unlocked through MSMEs can only be realised with a shared understanding ofthe needs as well as of the constraints of the different related stakeholders. Thepandemic has given us an opportunity to rethink the relationship of the macro withthe micro; of large financing infrastructure, institutions and regulatory frameworks torespond appropriately to the need and challenges of the large numbers of smallscale and decentralised businesses. Key stakeholders, especially MSMEs, financinginstitutions and regulatory bodies need to co-design financial frameworks,instruments and products for enabling MSMEs to go green. Think-tanks and civilsociety organisations can play a vital role here in providing a neutral space fordialogues to build a shared understanding regarding the taxonomy, frameworks andparameters for green finance for MSMEs. This can go a long way in helping co-create appropriate financial products and instruments. Civil society can further playa key role in piloting and testing new products with local micro enterprises, extend ecological and financial literacy to the entrepreneurs and track the impacts of green finance for MSMEs.

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

 Zeenat Niazizniazi@devalt.org

The views expressed in the article are those of the author’s and not necessarily those of Development Alternatives.

This blog first appeared as an editorial in Development Alternatives Newsletter January, 2021

https://www.devalt.org/newsletter/jan21/Edit.htm