Climate finance: A nudge for India’s MSMEs to pare emissions

United Nations Framework Convention on climate change (UNFCCC) defined climate finance as “local, national or translational financing- drawn from public, private and alternative source of financing – that seeks to support mitigation and adaptation actions that will address climate change.”

In simple words, climate finance takes into consideration the investments made by the policy makers, the corporate people and the households in order to bring about transition in the global economy towards a low- carbon path. In addition these investments are also carried out in way to reduce GHG concentration in atmosphere and also to build resilience of nations to climate change.

MSMEs (Micro, Small, Medium Enterprises) hold a dual relationship with climate finance. On one hand, approximately 30 percent of India’s gross domestic product comes from this industry, employing around 120 million people, and on the other hand they are vulnerable to its risk. Many research studies including the one by Centre for Study of Science, Technology & Policy (CSTEP) have reported that MSMEs are contributing significantly in green house gas emissions. 

The report showed that the industry in the years 2015-2016 consumed nearly 81 million tons of coal and lignite, 8.5 metric tons of petroleum products and 3.3 billion cubic meters of natural gas. Moreover, owing to fossil fuel usage, this sector generated around 110 million tons of carbon-dioxide equivalents, the CSTEP report further added.

COP26 demanded nations globally to make commitments on their part to attain a net zero carbon emission by 2050. India, laid off two commitments, one to fulfill half of nations energy requirement through renewable energy by 2030, and other one to achieve net zero emissions by 2070.

MSMEs are also being indirectly affected by climate risks. The physical risks (destruction of assets such as buildings and factories or damage to infrastructure) and transitional risks (shifts in market trends and emergence of different technologies, changes in policies and regulations) are responsible to slow down the operations of MSMEs, thereby leaving no option for the enterprisers but a need of immediate as well as considerable financial support. Thus, there’s no explanation required as to why these industries are in need to adapt technologies that not only lessen their emission footprints but also reduces their vulnerability to climate change.

The MSME industry in India is under large credit gap. In 2018, a report issued by International Finance Corporation found the credit gap to be nearly $37 billion in 2010 which rose to around $330 billion in 2017 (approximately 37% increase).

Factors that make climate finance hard to be accessed by MSMEs

1. Limited or lack of awareness regarding climate finance structure and policies is a great challenge for MSMEs to be addressed. Their constrained awareness of how they could earn profit in their business through climate finance is a factor that is deeply affecting these enterprises. For an instance, they could be unaware of how leveraging climate finance could help in mitigating some of their business risks, or how they could use modern and cost effective technologies to reduce their carbon emissions.
2. It was reported that merely 16 percent of the MSMEs were being benefitted financially by the Indian formal banking system. Having said that, the climate finance in our nation flows basically through these formal financing structures, having extremely strict rules and regulations as in Union Budgets, State Budgets and National Climate funds, which prove out to be another hurdle. Additionally, international climate finance organizations for example, Green Climate Funds (GCF) need applications from a qualified financial organization that is collaborated with a GCF accredited institution to develop approaches that provide financial solution to MSMEs.
3. A number of mechanisms and programs that are being supported by World Bank, GEF (Global Environment Facility) and other different institutions and are being potentially implemented for providing the benefits of climate finance to the MSMEs, especially in order to provide them transition to modern technologies. However, owing to the factors such as comprehensive procedural requirements including preparing the detailed project report, carrying out the energy and emission audits, and requirement of an upfront investment, MSMEs involvement into such schemes is limited to great extent.

Way forward

In the words of Phil McGraw, ‘Awareness without action is worthless’. 

It’s high time the Indian policy makers come forward and work on strategies trying to get finance to the MSMEs for helping the sector reduce its carbon footprints. This simply implies that climate finance must be routed to the MSME sector. The sector requires to be efficiently connected with more numbers of financial credit systems, enabling them to achieve the climate finance. This step could help MSME bridge their huge credit gap.