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

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Micro, Small and Medium Enterprises (MSMEs) are at the heart of the Indian
economy, with significant contribution to national GDP and employment. The SDG
framework brought the fundamental role of MSMEs in local and national
development to 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 does not necessarily indicate their
ecological performance and responsibility. Despite their high social and local
economy 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 the 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 eco-system 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 realised 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 decentralised 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 organisations 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 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 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 rejuvenation of local
ecosystem services made possible through local businesses.

 Zeenat Niazi
zniazi@devalt.org

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

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