Small businesses can help drive a green recovery from the pandemic

Small and medium-sized enterprises make up more than 96% of all Asian businesses. Their survival and resilience is essential for a green recovery.

The pandemic has laid bare the fragility of the small firms integral to the economies of Asia and the Pacific. That the health crisis has so easily turned back economic gains among small and medium-sized enterprises (SMEs) underscores just how critical it is to secure business continuity and preparedness.

As such, amid all the talk of a green recovery and building back better, SMEs will need strong access to green financing to make this work. These small enterprises can make a good business case for going green, including to boost resilience, reduce costs, and raise productivity, and thus support climate change mitigation and adaptation. But they need fine-tuned support to do so.

Small and medium-sized enterprises make up more than 96% of all Asian businesses. They provide two out of three private-sector jobs and, in aggregate, account for a large share of global resource consumption, pollution, and waste generation.

However, the pandemic has crippled economic activity, slashed earnings, remittances, and consumption, and swelled the ranks of the poor in developing countries in Asia by 162 million. This is measured by the $3.20 a day international poverty line. Clearly, SME survival and resilience is essential for a green recovery.

Clearly, SME survival and resilience is essential for a green recovery.

One area that needs immediate attention is the impact of climate change on these businesses. They are highly vulnerable in four areas to climate-related shocks and biodiversity loss: in capital, labor, logistics, and markets. These shocks can disrupt supply chain networks and operations and damage assets, installations, and inventories. This raises production costs and reduces revenues.

SMEs also tend to leave a big carbon footprint because of lack of investment in climate smart technology and being less regulated than large enterprises. Even climate-related disasters seriously inhibit their development. They have limited capacity to recover from these extreme events and to rebuild operations, revenue, and profit. They lack sound risk management, business continuity, and crisis management cultures.

Under these conditions, COVID-19 has left many SMEs in the red and more focused on survival than on going green.

A long-standing hurdle to helping these businesses is the lack of robust data and sustainable financing. Also lacking is the supervisory and regulatory framework for sustainable financing and the integration of environmental performance risk assessments associated with funding decisions. The diversity of financial institutions offering long-term capital for the sustainable finance needs of SMEs is insufficient. And institutional support is relatively weak.

COVID-19 has left many SMEs in the red and more focused on survival than on going green.

SMEs also lack awareness, technical capacity, and financial literacy to tap sustainability-related investments that can lower costs and enhance competitiveness.

But this can change. Countries can pursue financing strategies to provide tailored solutions to SMEs to pursue sustainability goals.

Public financial institutions such as state-owned development banks have often been the first to fill financial gaps in the market for SMEs. These institutions can support SMEs’ broader green banking environment via direct financing through low-cost credit lines linked to targeted green lending programs.

They can establish public-private partnership facilities, seeding clean technology funds and refinancing. Moreover, they can help unlock capital for startups and SMEs through liquidity-support instruments, such as green loan guarantees. Such measures can translate into the highest long-term multiplier effect available on economic growth, energy, and resource efficiency.

Green bonds also offer a range of sustainable financing options, including from banks that aggregate SME loans, and securitization of SME loans into asset-backed securities. Last year, Swiss-based Symbiotics raised money through the issuance of green bonds. They used the bond proceeds to issue a four-year senior unsecured, local currency loan of $ 7.75 million to Sri Lanka’s Pan Asia Banking Corporation for on-lending to projects with reduced environmental effects, e.g., renewable energy and sustainable agriculture.

Another example is Credit Guarantee Corporation Malaysia, which provides expertise, loan guarantees, financing facilities, and credit ratings to SMEs. While not focused explicitly on green investments, it aims to provide support to low-carbon projects.  Additionally, the Green Technology Financing Scheme provides soft loans guaranteed by financial guarantee insurer Danajamin to encourage the issuance of sustainable and responsible investment Sukuk that helps achieve green, social, and sustainable standards.

Assets dedicated to investment products by design are growing via impact investing for both “growth-stage” and traditional SMEs. Investors are seeking enterprises delivering social, environmental, and financial returns.

Fintech-enabled green finance solutions for SMEs can help improve efficiency of capital intermediation by lowering risk for financial institutions and reducing transaction burdens. This can reduce SMEs’ capital costs and incentivize them to deliver sustainability. It can also ease the granting of green credit, harnessing new data and information sources, or supporting collective action among SME stakeholders to build sustainable supply chains.

Recently Funding Options, a UK based cloud technology-based funding platform for small businesses, has launched a green finance marketplace. With the help of data analytics and open banking APIs (Application Programming Interface) they will incentivize SMEs to reduce their environmental footprint by matching ‘green demand’ with ‘green supply’. 

Private insurance against climate losses is another helpful instrument. It can protect SMEs from devastating storms, drought, higher sea levels, and environmental damage. And small businesses with broad insurance coverage recover faster from the financial impacts of extreme events.

For SMEs, access to green financing is akin to the mainspring of a clock that turns the gears and moves the hands.

Resetting the developmental clock by focusing its mainspring on a “green recovery” that builds back better is the goal. And the rethinking happening amid the current crisis offers the right timing for action.

This blog post is part of a series by the Asian Development Bank and Thinking Machines Data Science, Inc.