Climate Change

Greening of MSMEs key in India’s journey towards climate-resilience

Lack of awareness, limited training, capacity gaps, and insufficient knowledge about green finance markets, low-carbon technologies hinder MSMEs’ ability to adopt greener methods

Developing innovative and dedicated low-risk financial instruments is essential for MSMEs to prioritise technologies and accelerate investments. Representative photo: iStock.

Micro, small and medium-scale (MSME) sectors in India have been impacted by the risks associated with climate change. These businesses are engines of growth, as they promote grassroots innovation, strengthen value chains, effectively utilise latent local resources, and generate employment. Still, the sector is not shielded against climate change-associated damage, uncertainties, and financial risks.

Also read: India’s MSMEs must pare emissions and climate finance may be the nudge they need

MSMEs account for about 30 per cent of India’s GDP, employ 110 million workers, and have a 49 per cent share in exportsThere is, however, a compelling commercial rationale for corporate climate action.

The struggles of MSMEs in the aftermath of the 2015 Chennai floods and the COVID-19 pandemic demonstrate their high vulnerability and limited capacity to deal with external shocks.

A recently released government data showed that over 10,000 MSMEs were closed down in 2022-23, raising concerns over the sector’s health. Making matters steadily worse, climate-triggered heat stress is increasingly seen as putting unprecedented pressure on workers. Such risks impact infrastructure, operations, and resources, leading to a financial crunch, job losses, and migration.

Climate change and emerging transitional risks add to the challenges MSMEs face in terms of global competitiveness, a smaller scale of production, technology upgrades, access to credit, and building a skilled workforce. 

Besides the sector’s role in bridging economic disparities, the greening of MSMEs is key in India’s journey towards climate-resilient and just transition pathways.

Also read: COVID-19: Sitharaman’s MSME talk draws scepticism

The sector contributes significantly to greenhouse gas emissions. MSMEs generate around 110 million tonnes of carbon dioxide, equivalent to the energy usage of up to 50 million metric tonnes of oil per year from 200 energy-intensive manufacturing clusters in India, according to a 2018 report.

India has launched several ambitious plans to increase renewable energy production to cap emissions.

At the recently concluded COP27 in Sharm el-Sheikh, Egypt, India laid out its long-term low-emission development strategy, highlighting sector-wise approaches to achieve low-carbon pathways.

However, ample attention was not being paid to justice and equity issues in MSMEs’ ongoing transitions. The ability of MSMEs to effectively respond to climate-induced risks and adopt greener methods critically depends on addressing limitations in the path of climate resilience. 

These include a lack of awareness about climate-related risks, limited evidence, training and capacity gaps, and insufficient knowledge about access to green finance, low-carbon technologies and markets.

Thus, it is imperative to develop appropriate supply-chain-linked adaptation solutions to meet the challenges and save assets and livelihoods.

Resilience of MSMEs

There is a need to develop robust evidence on the vulnerability of and potential costs to MSMEs due to climate change. Adopting approaches such as value chain analysis could help identify climate hotspots, plausible disruptions, and critical areas for intervention.

Targeted provisioning of region-specific climate information, advisory and extension services using new-age technologies such as AI, remote sensing, and GIS may help manage risks.

Developing a reliable database for local resources and MSME-related indicators will leverage research and development to develop right-fit solutions for businesses. 

A key strategy to support MSMEs is raising awareness and building capacities of clusters or enterprises to anticipate, plan, and prioritise actions against climate impacts.

Organising sector- and cluster-specific training sessions or workshops, as well as creating modules on climate information, risk assessment, energy management and green opportunities, will help build preparedness in the face of growing risks.

Dedicated learning platforms can be developed to facilitate knowledge-sharing for adaptation solutions. 

MSMEs often lack capital to invest in green technologies. Developing innovative and dedicated low-risk financial instruments is essential for MSMEs to prioritise technologies and accelerate investments.

Also read: Industry 4.0: Smaller Indian firms need policy boost to catch up

Also, building technical know-how on green financing opportunities and exploring micro insurance risk mitigation mechanisms could help them cope with and recover from extreme climate events. To tap and negotiate on global climate finance, a strategic framework on just transition, addressing the country’s social and economic vulnerabilities, can be designed.

Understanding low-carbon transition in a bottom-up manner will promote long-term actions to minimise job losses, reskill workers for green jobs, and frame inclusive policies that support vulnerable workers in the sector.

Vocational education and training systems should develop a more dynamic approach that supports innovation and resilience. Training modules and action plans can be institutionalised to reskill and retrain workers in the MSME sector.

Integrating climate risks and adaptation strategies into sectoral plans and MSME programs will incentivise greener activities such as building resilient infrastructure, using efficient technologies, improving access to finance, and skill development.

The role of state governments is crucial in ensuring policy coherence and institutional convergence. This would lead to a greater flow of information between departments, promoting complementary actions on various policy areas, such as the dignity of labour, relocation and social protection, occupational health and safety, skill development, and insurance. 

Cluster-specific plans can be developed to encourage resource efficiency and adaptation practices. Moreover, large corporate houses, to which MSMEs are suppliers, can encourage resilient practices by aligning their policies with national climate goals.

Besides, with 20.4 per cent of women’s share in 63.4 million MSMEs, there is considerable scope for businesses to embed a gender-sensitive approach in their strategic investments and decisions. 

To accelerate adaptation planning and achieve India’s emission targets for 2030 and 2070, key stakeholders such as the government, industry associations, and the private sector should collaborate to boost MSMEs’ resilience and shape energy transitions.

Understanding the sector’s localised ecosystems and contextual requirements is critical to devising sector- or cluster-specific solutions, including appropriate policy measures.

The synergy between top-down and bottom-up approaches, as well as mainstreaming climate change resilience into policies and business strategies, will be key to resilience and a just energy transition.

The year 2023 offers a unique opportunity for India, through its G20 presidency, to promote global cooperation and foster meaningful negotiations on justice and equity issues for enterprises that are vulnerable to climate change and help them build resilience. 

The authors work with Climate Resilience Practice, World Resources Institute India

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Views expressed are the authors’ own and don’t necessarily reflect those of Down To Earth

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