Micro, small, and medium-sized enterprises (MSMEs) comprise the bulk – 99.9 p.c – of Indonesia’s enterprise inhabitants, and make use of 96.9 p.c of its whole workforce. They’re important drivers of financial development, however are concurrently a key contributor to the nation’s greenhouse fuel emissions. This has solely been worsened by the speedy development of Indonesia’s digital financial system.
After the COVID-19 pandemic, digital financial system investments reached a four-year excessive, totaling $4.7 billion within the first quarter of 2021, most of which got here from MSMEs that had shifted their actions to on-line platforms. Due to the rising public desire for on-line retail and the speedy enlargement of digital banking, the digital financial system development is projected to develop eightfold by 2030.
Nonetheless, this digital financial system development has carried a heavy environmental price. Globally, it has generated demand for over 42 million megawatt-hours of extra electrical energy and raised issues about digital waste administration. With extra Indonesian customers choosing on-line transactions, it’s tougher for the federal government to manage plastic utilization and waste disposal, particularly because the Authorities nonetheless has 11 million tons of unmanaged waste.
Throughout final 12 months’s G-20 Summit in Italy, President Joko “Jokowi” Widodo emphasised that the empowerment of MSMEs had grow to be a cornerstone of Indonesia’s inexperienced coverage. MSMEs are an integral a part of our financial system, and thus supporting their decarbonization course of is important to Indonesia’s renewable power transition.
Present market circumstances present a wonderful alternative to advertise extra sustainable choices for MSMEs. A current world survey discovered that 85 p.c of individuals had shifted their buying habits in direction of extra sustainable merchandise prior to now 5 years. That is additionally the case seen in Indonesia, the place extra customers have turned on the “go-green” choice in ride-hail functions equivalent to Gojek and Seize and opted for electrical automobiles, indicating that they’re keen to pay an additional cost to contribute to sustainability.
Experiences from international locations just like the United Kingdom, Denmark, and Switzerland reveal that adopting greener practices can carry advantages to MSMEs, equivalent to growing their competitiveness and resilience, opening new markets, decreasing prices, and bolstering their profitability. This inexperienced transition of MSMEs can be more likely to have qualitative impacts on job high quality and satisfaction. By growing the abilities and information of their staff, MSMEs may contribute to inclusive development.
Within the G-20 Leaders’ Declaration issued following final month’s summit in Bali, Jokowi additionally emphasised the necessity for restoration throughout numerous sectors, together with the constructing of resilience and the creation of sustainable industries for MSMEs. He described this as a obligatory effort to make sure that nobody is left behind within the world renewable power transition.
Because the momentum towards world sustainability continues to extend, we have to assist MSMEs in making sustainability the norm quite than the exception.
Unlocking Sustainable Funds for MSMEs
Decarbonizing MSMEs, nevertheless, entails critical investments in infrastructure, human sources, know-how, and analysis and growth. All of those efforts pose a monetary burden for MSMEs. This excessive burden and enterprises’ restricted sources have grow to be obstacles to MSMEs balancing their enterprise efficiency and environmental aims.
Entry to financing is an important think about facilitating MSMEs’ inexperienced transition. There are very restricted financing sources for small-scale inexperienced tasks in Indonesia, however blended finance will be an modern answer. Banks and personal traders usually shrink back from financing MSMEs’ tasks due to the small venture scale and associated funding dangers. Blended finance makes use of public funds, concessional donor funds, and affect funding funds to rebalance the risk-reward equation for pioneering investments in MSMEs. An incredible instance of a profitable blended finance venture is the Company Sustainability Bond for Pure Rubber Manufacturing, which was established by The Tropical Landscapes Finance Facility, a multistakeholder partnership by the UN Setting Program, The World Agroforestry Centre, BNP Paribas, and ADM Capital in 2018. The transaction includes a $95 million long-dated sustainability bond to finance pure rubber manufacturing throughout closely degraded concession areas in Jambi and East Kalimantan provinces. The venture additionally partnered with a world tire producer as a purchaser of future manufacturing.
Delivering capital for the decarbonization of MSMEs would require coordinated systematic efforts by the federal government, traders, and beneficiary MSMEs themselves. The forms of blended finance and the mechanism of fund allocation have to be tailor-made to the traits of Indonesian MSMEs. In line with the Convergence Historic Offers Database, Indonesia accounts for a preponderance of Southeast Asia’s blended finance transactions. Only recently, Indonesia launched a first-of-its-kind built-in funding platform referred to as SDG Indonesia One. The platform has already reached $3.03 billion in commitments from a litany of donors and traders. With the right approaches, this platform ought to have the ability to shut the monetary hole in Indonesia’s decarbonization journey.
An middleman group might help facilitate the method of implementing a blended finance framework, bridging the traders and MSMEs and performing as a capital market instrument that swimming pools funds and mobilizes non-public capital. The middleman group may play a catalytic position in strategic transactions between MSMEs and traders, facilitating the method in “comprehensible language” for each events.
The Function of Guardian Firms
One other mechanism for greening alternatives additionally exists by way of “mother or father corporations,” the bigger companies to which MSMEs present their merchandise and/or companies. A current research discovered that 100 corporations are chargeable for 71 p.c of worldwide emissions. A few of these corporations have manufacturing services in Indonesia and provide most Indonesian market merchandise. For these bigger companies, the strain to take sustainability actions is extra vital, and they’re therefore extra dedicated to decarbonizing their product life cycle.
An instance of such dedication was demonstrated within the B-20 occasions that had been held alongside the G-20 in Bali in November, the place the massive multinational companies and native corporations which might be a part of the Jababeka Industrial Property in Cikarang, West Java pledged to work collectively to grow to be the primary net-zero industrial cluster in Southeast Asia.
With the assist of those mother or father corporations, MSMEs can improve their consciousness of environmental points and scale back the monetary or data obstacles to motion. Given the fragmentation of the manufacturing course of, bigger corporations should think about that their environmental targets largely rely upon the greenness of their total provide chain.
Making a Supportive Setting
A current OECD report prompt that inexperienced public procurement might help create demand for inexperienced services when non-public demand is inadequate, decreasing the market constraint on MSMEs. Nonetheless, such incentive applications must be fastidiously deliberate to make sure long-term sustainability with out exacerbating subsidies already directed towards the power sector. Within the absence of well-designed and inclusive insurance policies, local weather change mitigation measures will undoubtedly place a better burden on MSMEs.
An instance of supporting regulation is the Indonesian Strategic Actions, which had been adopted by the Roadmap on Prolonged Producer Duty. Launched as a software to increase producers’ accountability over the life-cycle of a product and promote a extra round financial system, the coverage goals to cut back the full environmental prices of a product by participating corporations to kind their manufacturing and finish product waste.
An enabling atmosphere is important for MSMEs to interact in inexperienced enterprise efficiently. These enterprises usually have higher flexibility than bigger companies and might generally undertake new applied sciences extra shortly. The proper coverage, market framework, and requirements for MSMEs, that are custom-made to suit their wants and specificities, might help them contribute and reap the advantages of inexperienced development. MSME-compatible insurance policies and requirements additionally have to be geared up with the fitting public training measures.
The Path Ahead
With the strategic use of blended finance to shut the finance hole in inexperienced tasks, help from middleman organizations to bridge and guarantee efficient stakeholder collaboration, complete assist from bigger companies in decarbonizing the product life-cycle, and in-place supportive insurance policies, MSMEs can play an energetic position in serving to Indonesia attain its bold local weather objectives.
MSMEs supported Indonesia’s restoration efforts from the COVID-19 pandemic, and their position will be prolonged to the nation’s power transition efforts, making certain that the method advantages all. A joint effort by the federal government, the non-public sector, and beneficiary MSMEs shall be essential in collectively fixing our future local weather challenges.
The article was written with assist from Horionsah Hasan, First Secretary for Financial Affairs on the Indonesian Embassy, accredited to Denmark and Lithuania.