To green South-east Asia, help SMEs fund their sustainability efforts

WITH the worst of Covid-19 over, companies around the region are striving to restore pre-pandemic business-as-usual as quickly as possible. But having been buffeted by economic headwinds for the past three years and counting, recovery is proving slow for small and medium-sized enterprises (SMEs).

Without coffers as deep as those of multinationals, nor strategies as robust, SMEs’ top priority is to survive. This could be bad news for global momentum around sustainability.

A survey of 800 SMEs conducted last year by DBS and Bloomberg Media Studios found that SMEs across six Asian markets, including Singapore, are struggling to transition to more sustainable models while balancing business growth, even as they acknowledge ESG as a priority.

Among the challenges cited were a lack of funding, expertise, and standardised reporting. This was corroborated by a UOB survey of 800 Singapore SMEs which identified more barriers, such as inadequate support in areas like sustainability training.

With smaller players having few legal obligations and no immediate financial upside to ESG adoption, the pull towards survival over sustainability is expected to intensify amid tough economic conditions.

But SMEs, which form the backbone of South-east Asia’s economy, should not be left out from the ESG agenda. According to the International Federation of Accountants, these firms account for as much as 89 per cent to 99 per cent of businesses in the region, and 30 per cent to 53 per cent of each country’s gross domestic product.

Thus far, major stakeholders like governments and large corporates have led regional ESG efforts. But as climate change barrels forward, addressing SMEs’ challenges and helping them adopt responsible practices could be what is needed to achieve climate targets.

All about the money

How can the industry smoothen the sustainability journeys of the bulk of the region’s businesses?

One method is to incentivise through more lending schemes or benefits tailored for SMEs. Under Singapore’s Enterprise Financing Scheme-Green, for instance, the government shares 70 per cent of lending risks with financial institutions to encourage funding of SME solutions that reduce waste, emissions, or resource use. Within 10 months of the scheme’s launch in 2021, 19 firms borrowed close to S$60 million.

But the bulk of market schemes are designed for firms with the capacity to capture ESG data. Players such as digital financing platforms can cater to SMEs – particularly those without the size and credibility to access traditional financing – by accommodating their unfamiliarity with ESG reporting.

Such platforms have more flexibility to experiment with the types of financial products best suited for SMEs’ sustainability projects.

They are also in a position to tailor products according to the ESG data that SMEs have, and ensure requirements are not excessively stringent. For example, an IT firm might be exempted from submitting data around sustainable resource management, which is more relevant to manufacturers.

Digital financing platforms also play a key role in educating SMEs on the tradeoffs of ESG neglect. With sustainability-focused European investors increasingly looking at South-east Asian markets, SMEs with no systematic way of collecting or interpreting ESG data may be excluded from funding, or receive smaller sums.

Funding Societies, for example, surveys SME borrowers on their ESG maturity as part of the loan application process, to help them realise ESG is an increasingly critical criterion. Financing firms can also facilitate client-sharing on best practices to help SMEs improve and secure more funding.

Positive pressure

Many of South-east Asia’s SMEs are suppliers to multinationals in the US and European Union – markets with more stringent ESG benchmarks and a heavy emphasis on green supply chains.

The ESG roadmaps of big players can thus exert positive pressure on supplier SMEs, exposing them to concepts such as sustainable manufacturing. Corporations can go further to showcase success stories among suppliers, proving that SMEs can be green and still grow.

Cascading ESG knowledge down the value chain could also better prepare SMEs for new regulations. While demand for ESG disclosures has been largely focused on major players, regulators are increasingly expanding this scope.

Last year, the Singapore Exchange mandated climate reporting for listed companies and the Monetary Authority of Singapore launched a portal for companies to report ESG data, adding that it would use the lessons from this project to address the reporting needs of businesses, particularly SMEs.

While regulations are certain to ramp up ESG pressure, they should be accompanied by assistance for SMEs to build capability.

As SMEs struggle to integrate large goals like decarbonisation into day-to-day operations, regulators can help by breaking down concepts into simpler moves – for example, “reduce plastic” – and supply practical next steps.

Other organisations can help. Indonesia’s Kadin Net Zero Hub, for example, guides SMEs and corporations in drawing up net-zero roadmaps, while the Singapore Green Finance Centre aims to develop a pipeline of green finance talent.

One greener company may not tip the scale, but SMEs form the bulk of South-east Asia’s economy and have immense collective impact. Lenders, corporates and governments should wield their considerable influence to oil the ESG transitions of this group. In doing so, they’re making a significant difference to the future of the region, and the world.

The writer is co-founder and group chief executive officer of Funding Societies’ Modalku, an SME digital financing platform.