Energising MSMEs For A Sustainable India

India has set an ambitious goal of achieving net-zero emissions by 2070. This necessitates a transformative shift in its energy landscape. Central to this transition is the role of the 63.3 million plus Micro, Small, and Medium Enterprises (MSMEs), which constitute the backbone of the Indian economy. Consuming approximately 25 percent of the industrial sector's energy and contributing to over 72 million metric tonnes of CO2 emissions projected by 2030 (as per TERI), MSMEs are both significant energy consumers and contributors to the nation's carbon footprint. Their trajectory towards sustainability is therefore vital for India to meet its climate targets while fostering economic growth. 

Rising Energy Costs: The Financial Crunch 

According to the Observer Research Foundation (ORF), MSMEs spend between 5 percent and 20 percent of their operational expenses on electricity costs, which is higher when compared with larger firms across different industrial segments. With energy prices continuing to rise, MSME profit margins are getting squeezed. This financial burden creates a competitive disadvantage for MSMEs, as higher operational costs reduce market competitiveness.

Regulatory Pressures: Compliance is Non-negotiable

The regulatory landscape is shifting rapidly with the introduction of stringent environmental regulations. The Securities and Exchange Board of India (SEBI) has been at the forefront, mandating ESG-related disclosures for the top 1,000 listed companies in India. From 2022-23, SEBI’s Business Responsibility and Sustainability Report (BRSR), with more detailed, quantifiable metrics aligned with the 'National Guidelines on Responsible Business Conduct', became mandatory for the top 1,000 companies. In July 2023, SEBI introduced the BRSR Core framework for ESG disclosures, focussing on value chains. Starting in 2024-25, these disclosure requirements will apply to the top 250 listed companies and gradually extend to the top 1,000 entities by 2026-27. The value chain disclosure will cover a listed company’s top upstream and downstream partners, accounting for 75 percent of its purchases and sales by value. Since MSMEs form a large part of the supply chains of these large companies, they will also have to comply with ESG reporting guidelines so as to continue their partnership. 

Hence, MSMEs that successfully implement and report on their ESG practices will gain a competitive advantage by attracting business from larger companies that are required to comply with ESG regulations across their supply chains. 

Customer Demands: The Shift Towards Sustainability 

Today's consumers are more aware of the environment than ever. There is a growing preference for products and services from businesses that prioritise sustainability. This shift in consumer behaviour creates a significant opportunity for MSMEs to tap into the market for eco-friendly products. By embracing sustainability, MSMEs can attract a loyal customer base that values green products, enhancing their market position. 

Global Trends: Aligning with International Standards

Globally, regulatory frameworks are evolving to prioritise energy transition and sustainability. Regulations like the EU's Corporate Sustainability Reporting Directive (CSRD) require companies to disclose climate-related risks and opportunities not only connected to their own operations but also their upstream and downstream supply chains. This can influence investor decisions and create a preference for companies with low-carbon business models.

MSMEs involved in exports, particularly to developed markets, have no choice but to align with global sustainability standards because their overseas buyers have stringent ESG clauses in their purchase contracts. By aligning with these standards, MSMEs can become more attractive to foreign partners, opening up new markets and enhancing their global sales. Therefore, adhering to sustainability standards isn't just about compliance for MSMEs; it is also about seizing opportunities in the global marketplace. 

Financial Opportunities: The Incentives for Green Transition 

According to a DBS Bank and Bloomberg Media Survey, 81 percent of SMEs believe that financial incentives and government programmes have a significant impact on the adoption of ESG. Various subsidies and grants are available to Indian MSMEs for adopting green technologies. Government schemes like the Raising & Accelerating MSME Productivity (RAMP) scheme, the MSME Sustainable ZED certification scheme, Technology and Quality Upgradation (TEQUP) scheme, Grid-connected Rooftop Solar Program, the National Mission for Enhanced Energy Efficiency (NMEEE), etc. provide financial support to MSMEs making this green transition. Multilateral collaborations, like the BEE-UNIDO-GEF Programme and the JICA-SIDBI Financing Scheme, are also pivotal in mobilising finance for low-carbon transition in MSME clusters. 

Long-term Sustainability: Ensuring Future Viability 

Traditional energy sources are depleting, posing a risk of future operational disruptions and cost escalations. The impacts of climate change are also becoming more evident, affecting business operations. MSMEs are particularly vulnerable to climate risks such as extreme weather events, which can disrupt supply chains and damage infrastructure. Transitioning to sustainable energy sources not only ensures business continuity but also positions MSMEs for long-term growth and stability. 

A Complex Path to Clean Energy 

While ESG ratings are gaining prominence, MSMEs face challenges such as a lack of awareness of the government’s green transition schemes and engaging with government bodies to take advantage of these schemes. Industry associations and government bodies will have to drive awareness in the MSME community about these schemes to drive their adoption.

Another major challenge faced by MSMEs is the difficulty in understanding and meeting ESG reporting requirements of large corporates that have arisen due to statutory reporting requirements. Consequently, large companies will have to hand-hold and coach MSMEs in their value chains to help them monitor and report performance on sustainability metrics.   

In India, it is imperative that all stakeholders recognise that the path to clean energy leads through the MSME sector. For the country to meet its net-zero emission target by 2070, the MSME sector will have to be incentivised and fully engaged in the green transition. 

(Tushar Bhaskar, CBO, Rubix Data Sciences)