Achieving sustainability in the SME way

The mightiest oak trees were once little acorns. Today’s MNCs were once SMEs, with the initial investment perhaps coming from families, relatives, or by dissolving FDs so dear to them. We might not always find SME owners on the glossy cover pages of business magazines, but don’t they determine a country’s economic health?

In creating job opportunities, helping competition in emerging markets, and having a strong presence in three major industries – service, manufacturing and distribution – they have a significant role in driving countries’ economies.

History stands witness...

Traditionally, India has always upheld the philosophy of self-reliance. The country’s first Prime Minister Jawaharlal Nehru had envisaged an India that wouldn’t be dependent on imports from other countries. Entrepreneurial spirit was the way forward. The onus was on small entities to provide the rocket fuel that drives the economy. If India has the confidence to be an economic superpower, the contribution of SMEs in its storied economic history can’t be understated.

Despite limited working capital and financing gaps, SMEs and MSMEs continue to lead nations towards economic growth.

The government of India first introduced this concept through the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. Today, the number of unicorns, or new businesses valued at over $1bn, is rising every year. Numbers reveal a poignant picture.

What’s the role of SMEs in the Indian economy?

A recent article published by Greeneconomycoalition.org cites a FICCI report as saying that MSMEs account for roughly 40% of exports, 45% of manufacturing output and 95% of the industrial units. It adds that the sector creates employment opportunities for almost 60mn people in rural areas, making it the primary source of income generation, second only to the agriculture sector.

A part of the report reads: “Development of this sector, thus, holds the key to inclusive growth and plays a critical role in India’s future. All these parameters contribute towards the potential of the sector to be an alternative source of livelihood for the masses, thereby contributing to the country’s GDP.”

A report published by Entrepreneur.com reveals:

–          Around 36mn MSMEs are creating 80mn employment avenues.

–          They’re contributing to:

–          They account for over 80% of the total industrial enterprises in India.

–          They’ve created over 8000 value-added products.

Why is sustainability assessment important for SMEs?

SMEs and MSMEs that adopt sustainable practices enjoy profits in the long run and win investors’ faith. Even end users want to associate themselves with organisations that follow sustainable supply chain processes. Large corporates, big brands and export units, which have SMEs as their key supply chain partners, insist on sustainable practices and are keen that they foster a culture of ESG compliances across their supply chain.

Role of SMEs for sustainable India

Since these firms contribute to over 50% of India’s manufacturing output, they must achieve their ESG goals. They can do so by focusing on innovation, embracing clean energy, recycling water in manufacturing plants, tackling obsolete technology, switching to green hydrogen, and exploring the potential of bio-mass, particularly in the form of algae, which can reabsorb carbon. SMEs and MSMEs demonstrate the right ESG spirit when they improve working conditions, implement a fair-wage policy and address health and safety concerns.

Role of government in ensuring sustainable development for SMEs

The Indian government is doing its bit to back SMEs. For example, the government has introduced several policies to help SMEs adopt green technologies.

Credit Linked Capital Subsidy for Technology Upgradation (CLCSS), Rural Industry & Entrepreneurship (ASPIRE) and Design Clinic for Design Expertise are schemes offered to the MSMEs keen on sustainable upgradation. The ‘Make in India’ initiative remains a pivotal step to achieving sustainable economic growth by the government.

That said, SMEs and MSMEs still confront the occasional challenge. How do they measure and improve sustainability performance? What are the performance indicators? Firms of different sizes can have environmental impacts at domestic and national levels. It’s here that specialised SME rating agencies, with a customised offering for sustainability assessment, come in.

How SMERA is helping SMEs grow sustainably? (SMERA sustainability assessment)

SMERA’s assessment framework weighs sustainability performance on a five-star rating scale wherein five stars indicate companies with a strong sustainability risk management framework, while one-star points to sub-par performance. SMERA’s sustainability score for SME credit rating provides a summary of a company’s sustainability strategy, initiatives and results across six themes encompassing:

Environmental Impact of Operations

Sustainability Initiatives

Business Ethics

Employee development and Community support

Consumer and Product Responsibility

ESG Reporting Transparency

For the record, SMERA has rated over 50,000 SMEs.

Sustainability and profits go hand in hand

As young and agile entities, SMEs have definite advantages. However, they could still do with some assistance in the form of:

  • Constant backing in the form of capital so that they invest in innovation.
  • Education on social issues and human rights.
  • Awareness programmes to make them believe that sustainability is not achieved at the expense of profits. The two go hand in hand.

In a recent interview with Economic Times, Pradeep S Mehta, Secretary General, Consumer Unity & Trust Society (CUTS International), said: “It is a better business model to internalise sustainability. However, to enable MSMEs to make their business model sustainable without losing profitability, we need to keep working on technology and market innovations. In parallel, we need to identify emerging sectors where the potential for setting up new MSMEs is already high. Waste management, decentralised renewable energy or energy-efficient constructions are such examples.”

Sustainability in SME’s interests...

SME finance remains a talking point in our country. A strong sustainability record can, to some extent, clear the credit resistance that SMEs and MSMEs face from lending institutions or investors.

Moreover, making sustainable products can help SMEs build market share, identify new areas of competencies and respond to supply-chain demands. When the ‘role of SMEs in India’ is prominently discussed – and it should, given SME’s standing as the country’s growth engine – sustainability is bound to dominate conversations.

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