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Greening MSMEs is essential to help move the private sector to a low carbon trajectory

  • By KCV
  • July 14, 2021

The private sector is the largest energy user and greenhouse gas producer and will play a vital role in mitigation. The private sector will undoubtedly also require greater climate resilience to protect its business interests (including a wide range of factors beyond direct business assets, extending to employees’ resilience and their families, consumers, infrastructure, supply chains, etc.).

Globally, the private sector spends USD 191 billion per year on climate mitigation and adaptation, representing more than half of all climate finance. Future private sector climate finance investment will need to grow significantly if we are to reach the USD 1 trillion globally required each year. If the private sector share of climate finance remains constant, it would need to invest USD 580 million annually to keep the Earth on a 2°C emission path. However, even more may be required from the private sector, as the public sector will likely be unable to provide the remainder of the USD 1 trillion.

MSMEs account for 90% of businesses in developing countries, and even small changes to behaviours, energy use, water consumption, etc., have significant potential for impact. Therefore, greening MSMEs is essential to help move the private sector to a low carbon trajectory.

Beyond this, some MSMEs provide essential climate technologies that have significant potential to drive mitigation and adaptation across economies. Due to their local networks in many developing countries, MSMEs are uniquely positioned to deliver such technologies and services to the pyramid base and increase the resilience of the most impoverished populations. 

Estimating the size and scope of the climate finance needed for MSMEs is challenging. Existing analyses estimate the annual MSME credit gap at around USD 2.5 trillion and the yearly climate finance gap at approximately USD 600 – 700 billion per year. The climate finance gap for MSMEs is the intersection of these two estimates. Still, the amount required has not been estimated due to the absence of reliable and consistently monitored data sources on earmarked financial flows to MSMEs.

The capacity for MSMEs to realize their potential role in climate action is restricted by a lack of access to climate finance. This is primarily due to weak enabling environments, limited knowledge and awareness of finance opportunities, and inappropriate financial products.

An adequate response to the growing threat of climate change in developing countries requires more significant involvement of the private sector – particularly micro, small and medium-sized enterprises (MSMEs). Greening MSMEs will be essential to help move the private sector to a low-emission, climate-resilient development pathway. The World Bank says that support needs to be given to MSMEs to conduct a range of greening activities or MSMEs producing climate technologies.

The specific needs of MSMEs change depending on their stage in the growth cycle. Products can be tailored to each stage. Early-stage MSMEs will require non-collateralized capital from investors with significant risk appetites such as impact investors, foundations, or grants from donors or development banks. MSMEs undergoing rapid expansion with new products (or new markets) will often require debt finance linked to venture capital or specific additions and projects to help the business proliferate. This could come from investors such as venture funds, development banks or commercial banks. Most MSMEs will require working capital, particularly in rapidly growing markets, and this could be made widely available from development or commercial banks.