Indian Micro, Small, and Medium Enterprises (MSMEs) are powerhouses in the international trade landscape, contributing significantly to India's economic growth and global market presence. They account for a significant 45 per cent of the nation's exports, but are increasingly finding themselves challenged by climate targets, disclosures and trade-related barriers for which they are left underprepared. In fact, at this year’s G20, Ministers issued the Jaipur Call for Action to enhance access to aggregated trade-related information relevant for MSMEs.
It is becoming increasingly apparent that in order for Indian small enterprises to survive and grow within global value chains, they need to develop a strategic plan for emissions reductions, as a result of the recently concluded climate negotiations at COP28.
The big buyer influence
Large corporations and multinational companies (MNCs) play a substantial role in driving MSME sustainability and wield considerable influence in shaping industry standards.
Big businesses committing to net zero targets recognise that a majority of their emissions are embedded in the products and services they source and supply. Acknowledging the significance of addressing these scope 3 emissions, businesses are now prioritising suppliers who align with their sustainability goals. This paradigm shift has a profound effect on Indian MSMEs, which often lack the resources, expertise, and capacity to adapt swiftly.
Traditionally, major buyers using a top-down approach including system-level changes driven by policy and operational directives for sustainability, have seen limited supplier engagement and impact on the ground. While some global corporations like IKEA recommend the SME Climate Commitment and United Nations backed Race to Zero campaign to small businesses in their network, PwC promotes setting of science based targets among suppliers for climate commitments. Our work with small businesses reveals that MSMEs which are not part of such networks typically feel overwhelmed and are unsure about available incentives and resources.
Hence, there lies a win-win opportunity for larger enterprises and brands to engage in guiding and supporting their suppliers towards decarbonisation, and in turn benefit from greater impact to their own emissions reduction.
Evolving consumer preferences
In many instances, businesses tend to cite the belief that customers are not interested in sustainability. However, trends clearly indicate that consumer preferences are evolving all across the world. The conscious consumer demographic is expanding rapidly and driving demand for environment friendly alternatives.
In fact, the Indian Government’s clarion call emphasising sustainable lifestyles and consumption through Mission LiFE has found global resonance at COP28 and was prominently featured in New Delhi’s Leader Declaration at G20 this year. Even large businesses are supporting responsible consumption, a prominent example being Flipkart, which has introduced sustainable packaging options and reduced the flow of plastics in their shipments.
These changing consumer preferences present a tremendous business opportunity for MSMEs. Recent case studies from India highlight small sustainable enterprises that are finding success by capturing and expanding their market with a range of exclusive eco-friendly products. This not only paves the way for a future-ready business, but also fosters a more sustainable future for our planet.
International trade policies, taxes and certifications
The third component incentivising and driving net zero action is the rapidly evolving and tightening trade-related rules and taxation on carbon-emissions. The Carbon Border Adjustment Mechanism (CBAM) is one such example. MSMEs from Indian foundry clusters exporting to the EU have cited buyers’ discussions around CBAM (the proposed imposition of tariffs on products from regions with less stringent environmental standards). Other developments such as the EU Supply Chain Due Diligence Directive or the proposed New York Fashion Act call for better supply chain mapping and addressing the environmental and social hotspots in global supply chains. This poses a challenge for small enterprises since it requires an understanding of the risks associated with these policies to ensure business continuity and profitability.
Recent evidence shows that leading Indian SMEs are already taking proactive measures to stay ahead of the curve. These businesses are actively aligning their strategies with anticipated global policy changes.
In this environment of increased compliance and emerging risks, certifications related to sustainability and climate standards are becoming gateways to global markets. Certifications are a sure way of building credibility and demonstrating adherence to the market requirements. However, there is a need to make them more affordable and accessible while hand holding MSMEs to leverage their full potential.
Through our engagements with small businesses in the country, we see the need to build greater awareness of changing demands and thereby prepare MSMEs to take action towards a smoother transition. Despite challenges, we recognise potential for small businesses to not just adapt but flourish within this evolving landscape. Many women-led entrepreneur networks and small business associations are already deeply engaged with MSME leaders to help prepare for these changes. They serve as gateways to knowledge repositories, capacity building opportunities and peer learning, all towards empowering MSMEs to build businesses of the future.
The OECD rightly stated that there is no net zero without SMEs. The tide is turning on a global scale as countries and regions increasingly prioritise integration of MSMEs into their sustainability agendas. During COP28 this year, noteworthy leaders such as the European Union (EU) and the United Arab Emirates (UAE) spearheaded events that shed light on the need for more tools to support SMEs rather than ever increasing rules.
The Post-COP28 era solidifies the understanding that business success is intricately linked to climate action, compelling enterprises to not simply acknowledge but actively contribute to addressing the global climate crisis. Sustainability is no longer just a trend, it is a fundamental shift that businesses of all sizes must embrace if they want to survive and thrive in an evolving global landscape.
(The article is written by Pallavi Ahuja, India Lead, SME Climate Hub & Devyani Hari, Director, Centre for Responsible Business)
(The opinions presented belong solely to the authors)
