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Growing SMEs Amidst Climate Change

  • By KCV
  • February 26, 2020

Climate change continues to increase risks to businesses, infrastructure, assets and economies leading to slower than expected growth of Small and Micro Enterprises (SMEs) into corporates that are able to promote climate-smart solutions. Small, Medium and Scaling Enterprises can be a channel through which resilient green growth can be achieved, but there is a challenge.

Businesses and business models which have attempted to create transformational opportunities and adaptive growth for local populations have faced a myriad unprecedented environmental and business risks. Inability to recognise and evaluate the materiality of climate change risks and a lack of knowledge on how to manage them represent key barriers to private investors in responding to climate change. This is particularly true for SMEs in middle-income and developing markets. To overcome such constraints, and show the business case for investment, requires collective and concerted efforts by stakeholders- both public and private sector. Such constraints undermine the take-off, growth and longevity of the change which markets and communities require to be resilient to climate change.

To sustain resilience, deliberate efforts to address growth of businesses and longevity of solutions must be addressed. Let’s take on the investors’ contribution to tackling climate change. Like any other business, climate-smart solutions require capital to thrive. They are committed to thrive in logistically challenging markets– where the cost of doing business is high and characterized by intermittent flow of revenue.

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Most of the climate-smart solution providers are SMEs at early stage. These enterprises yearn to grow but require more than capital to achieve growth.  It may appear much easier to provide capital to much established multinationals to provide climate-smart services, but this suffers lack of localised solutions for transformational adaption. Then, the next challenge is how to replicate localized solutions. Sustainable businesses require scale. They need to standardize processes and products to minimize unit cost of production in the long run.  For climate-smart businesses, the long run is not definite and will never be defined.

Either way, irrespective of the size of a business- being early or growth  stage; SME or established expanding multi nationals – business risks due to climate change are real and often  challenge the growth of markets and provision of services to the most exposed communities and markets. This validates the fact that a package of support is necessary for a mix category of players. With ever limited resources, businesses which area most vulnerable to climate change-oriented market risks deserve more attention. These are SMEs, early and growth stage companies.

How about stimulating both established companies and SMEs to respond to the climate related business risks in the same markets? This blend can create an ecosystem where SMEs emerge and grow as result of crowding in players within various climate value chains. Some SMEs may transform into corporates, but with difficulties. Deliberate growth can only be achieved when market systems change and improve in favor of SMEs.

Understanding how to involve the private sector and SMEs in responding to these risks- or encouraging them to take advantage of the new business opportunities that may arise from changing climate conditions is crucial to catalyze greater investment in activities that increase market, businesses and communities’ resilience. Development finance institutions (DFIs) and other organizations have employed a variety of approaches to tackle pre-investment and investment stage barriers hindering private action in climate resilience- grants or concessional loans from donors often support proof of concept and piloting projects and business models.

Blending concessional and commercial financing is important. Globally, approximately US$ 134 billions of green finance has been cited, of which US$ 125 million is climate financing. There is growing interest of venture capital funds in climate financing. One such, venture facility is Kenya Climate Ventures (KCV) Limited, a cleantech financing company in Kenya, providing debt and convertible debt to early and growth stage businesses with potential to scale climate resilience and are capital intensive, have long payback periods, or carry firstmover risks.

Over 4 years, KCV has invested US$ 1.6 million to mix of market-based climate smart solutions in Kenya, the most recent investment being a 5-year debt facility to Mace Foods Limited. With an upgraded processing factory for chilli and other horticultural produce, the company is expected to guarantee market and incomes for over 2,000 smallholder farmers across 14 counties in Kenya and consistently supply powdered chilli to both local and export markets in Germany, Italy and the United Kingdom.

In addition to capital, KCV provides technical assistance and business development support to help address knowledge and capacity gaps, increasing their chances to thrive in such difficult markets.