Micro, small and medium-sized enterprises (MSMEs) make up the majority (99.9%) of Indonesia’s business population and employ 96.9% of its total workforce. They are essential drivers of economic growth, but at the same time are key contributors to the country’s greenhouse gas emissions. This has only been made worse by the rapid growth of Indonesia’s digital economy.
Following the COVID-19 pandemic, investments in the digital economy reached a four-year high, totaling $4.7 billion in the first quarter of 2021, most of which came from MSMEs that had shifted their activities to online platforms. Due to the growing public preference for online retail and the rapid expansion of digital banking, the growth of the digital economy is projected to grow eight times by 2030.
However, this growth of the digital economy has come at a high environmental cost. Globally, it has generated a demand for more than 42 million megawatt-hours of additional electricity and raised concerns about digital waste management. With more Indonesian consumers opting for online transactions, it is more difficult for the government to control plastic use and waste disposal, especially since the government still has 11 million tons of unmanaged waste.
During last year’s G-20 Summit in Italy, President Joko “Jokowi” Widodo emphasized that MSME empowerment had become the cornerstone of Indonesia’s green policy. MSMEs are an integral part of our economy and therefore supporting their decarbonization process is essential for Indonesia’s renewable energy transition.
Current market conditions provide an excellent opportunity to promote more sustainable options for MSMEs. A recent global survey found that 85 percent of people they had changed their purchasing behavior towards more sustainable products in the last five years. This is also the case seen in Indonesia, where more consumers have turned on the “green” option on ride-sharing apps like Gojek and Grab and have opted for electric vehicles, signaling that they are willing to pay an extra charge to contribute. to sustainability.
Experiences from countries like the United Kingdom, DenmarkY Swiss demonstrate that the adoption of greener practices can bring benefits to MSMEs, such as increasing their competitiveness and resilience, opening new markets, reducing costs and strengthening their profitability. This green transition of MSMEs is also likely to have qualitative impacts on job quality and job satisfaction. By increasing the skills and knowledge of their employees, MSMEs can also contribute to inclusive growth.
In it Declaration of the leaders of the G-20 Issued after last month’s summit in Bali, Jokowi also stressed the need for recovery in various sectors, including building resilience and creating sustainable industries for MSMEs. He described this as a necessary effort to ensure that no one is left behind in the global renewable energy transition.
As the momentum towards global sustainability increases, we must support MSMEs to make sustainability the norm rather than the exception.
Unlocking sustainable finance for MSMEs
However, decarbonizing MSMEs implies serious investments in infrastructure, human resources, technology, and research and development. All these efforts represent a financial burden for MSMEs. This high burden and limited company resources have become obstacles for MSMEs to balance their business performance and environmental goals.
Access to financing is a crucial factor to facilitate the green transition of MSMEs. There are very limited sources of finance for small-scale green projects in Indonesia, but blended finance can be an innovative solution. Banks and private investors often avoid financing MSME projects due to the small scale of the project and the related investment risks. Blended financing uses public funds, concessional donor funds, and impact investing funds to rebalance the risk-reward equation for pioneering MSME investments. A great example of a successful blended finance project is the Corporate Sustainability Bond for the Production of Natural Rubberwhich was established by The Tropical Landscapes Finance Facility, a multi-stakeholder partnership of the United Nations Environment Programme, The World Agroforestry Centre, BNP Paribas and ADM Capital in 2018. The transaction involves a $95 million long-term sustainable bond to finance natural rubber production in heavily degraded concession areas in Jambi and East Kalimantan provinces. The project also partnered with a global tire manufacturer as a buyer for future production.
Delivering capital for the decarbonization of MSMEs will require coordinated systematic efforts by government, investors and the beneficiary MSMEs themselves. The types of blended finance and the funding allocation mechanism need to be adapted to the characteristics of Indonesian MSMEs. According to the Convergence Historical offer database, Indonesia accounts for a preponderance of Southeast Asia’s combined financial transactions. Indonesia recently launched an integrated financing platform, the first of its kind, called SDG Indonesia One. The platform has already arrived $3.03 billion in commitments of a litany of donors and investors. With the right approaches, this platform should be able to bridge the financial gap in Indonesia’s decarbonization journey.
An intermediary organization can help facilitate the process of implementing a blended finance framework, bringing together investors and MSMEs and acting as a capital market instrument that pools funds and mobilizes private capital. The intermediary organization can also play a catalytic role in strategic transactions between MSMEs and investors, facilitating the process in “understandable language” for both parties.
The role of parent companies
Another mechanism for the greening of opportunities also exists through the “parent companies”, the largest corporations to which MSMEs provide their products and/or services. A recent study found that 100 companies are responsible for 71 percent of global emissions. Some of these companies have production facilities in Indonesia and supply most of the products on the Indonesian market. For these larger corporations, the pressure to take sustainability action is more significant, and they are therefore more committed to decarbonising the life cycle of their products.
An example of such a commitment was demonstrated in the B-20 events that took place along with the G-20 in Bali in November, where large multinational corporations and local businesses that are part of the Jababeka Industrial Estate in Cikarang, West Java, pledged to work together to become the first net-zero industrial cluster in the South East Asian.
With the support of these parent companies, MSMEs can increase their awareness of environmental issues and reduce financial or informational barriers to action. Given the fragmentation of the production process, larger companies must consider that their environmental objectives are highly dependent on the ecology of their entire supply chain.
Create a supportive environment
a recent OECD report suggested that green public procurement can help create demand for green products and services when private demand is insufficient, reducing the market constraint for MSMEs. However, such incentive programs need to be carefully planned to ensure long-term sustainability without exacerbating the subsidies already directed towards the energy sector. In the absence of well-designed and inclusive policies, climate change mitigation measures will undoubtedly place a greater burden on MSMEs.
An example of supporting regulation is that of Indonesia Strategic Actionsthose who were followed by Roadmap on Extended Producer Responsibility. Presented as a tool to extend the responsibility of producers during the life cycle of a product and promote a more circular economy, the policy aims to reduce the total environmental costs of a product by involving companies to classify their production and final product waste.
An enabling environment is necessary for MSMEs to successfully engage in green business. These companies often have greater flexibility than larger companies and can sometimes adopt new technologies more quickly. The right policy, market framework and standards for MSMEs, tailored to their needs and specificities, can help them contribute to and reap the benefits of green growth. MSME-friendly policies and standards must also be equipped with appropriate public education measures.
The way to follow
With the strategic use of blended finance to close the financing gap in green projects, the assistance of intermediary organizations to close and ensure effective stakeholder collaboration, the comprehensive support of the largest corporations to decarbonise the product life cycle and With supportive policies in place, MSMEs can play an active role in helping Indonesia achieve its ambitious climate goals.
MSMEs supported Indonesia’s recovery efforts from the COVID-19 pandemic, and their role can extend to the country’s energy transition efforts, ensuring that the process benefits everyone. A joint effort by government, the private sector and beneficiary MSMEs will be crucial to collectively solving our future climate challenges.