MSMEs: The Key to Indonesia’s Decarbonization Efforts

Micro, small, and medium-sized enterprises (MSMEs) comprise the bulk – 99.9 % – of Indonesia’s enterprise inhabitants, and make use of 96.9 % of its complete workforce. They are 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. Because of the rising public desire for on-line retail and the speedy growth of digital banking, the digital financial system development is projected to develop eightfold by 2030.

However, this digital financial system development has carried a heavy environmental value. Globally, it has generated demand for over 42 million megawatt-hours of extra electrical energy and raised considerations 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 Government nonetheless has 11 million tons of unmanaged waste.

During final yr’s G-20 Summit in Italy, President Joko “Jokowi” Widodo emphasized that the empowerment of MSMEs had change into 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 crucial to Indonesia’s renewable power transition.

Current market situations present a wonderful alternative to advertise extra sustainable choices for MSMEs. A latest world survey discovered that 85 % of individuals had shifted their buying habits in the direction of extra sustainable merchandise previously 5 years. This can also be the case seen in Indonesia, the place extra customers have turned on the “go-green” possibility in ride-hail purposes resembling Gojek and Grab and opted for electrical automobiles, indicating that they’re prepared to pay an additional cost to contribute to sustainability.

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Experiences from nations just like the United Kingdom, Denmark, and Switzerland reveal that adopting greener practices can carry advantages to MSMEs, resembling growing their competitiveness and resilience, opening new markets, decreasing prices, and bolstering their profitability. This inexperienced transition of MSMEs can also be more likely to have qualitative impacts on job high quality and satisfaction. By growing the talents and data of their staff, MSMEs may contribute to inclusive development.

In 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.

As the momentum towards world sustainability continues to extend, we have to assist MSMEs in making sustainability the norm relatively than the exception.

Unlocking Sustainable Finances for MSMEs

Decarbonizing MSMEs, nonetheless, 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 change into obstacles to MSMEs balancing their enterprise efficiency and environmental goals.

Access 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 could be an modern resolution. Banks and personal traders usually shrink back from financing MSMEs’ tasks due to the small mission 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. A fantastic instance of a profitable blended finance mission is the Corporate Sustainability Bond for Natural Rubber Production, which was established by The Tropical Landscapes Finance Facility, a multistakeholder partnership by the UN Environment 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 mission 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 varieties of blended finance and the mechanism of fund allocation must be tailor-made to the traits of Indonesian MSMEs. According to the Convergence Historical Deals Database, Indonesia accounts for a preponderance of Southeast Asia’s blended finance transactions. Just lately, 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 proper approaches, this platform ought to be capable 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 appearing as a capital market instrument that swimming pools funds and mobilizes non-public capital. The middleman group may play a catalytic function in strategic transactions between MSMEs and traders, facilitating the method in “understandable language” for each events.

The Role of Parent Companies

Another mechanism for greening alternatives additionally exists by way of “parent companies,” the bigger companies to which MSMEs present their merchandise and/or companies. A latest examine discovered that 100 firms are answerable for 71 % of worldwide emissions. Some of those firms have manufacturing amenities 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.

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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 firms which might be a part of the Jababeka Industrial Estate in Cikarang, West Java pledged to work collectively to change into the primary net-zero industrial cluster in Southeast Asia.

With the assist of those mum or dad firms, MSMEs can improve their consciousness of environmental points and scale back the monetary or info boundaries to motion. Given the fragmentation of the manufacturing course of, bigger firms should think about that their environmental targets largely rely on the greenness of their complete provide chain.

Creating a Supportive Environment

A latest OECD report steered that inexperienced public procurement might help create demand for inexperienced services and products when non-public demand is inadequate, decreasing the market constraint on MSMEs. However, such incentive applications needs to be rigorously deliberate to make sure long-term sustainability with out exacerbating subsidies already directed towards the power sector. In 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 Extended Producer Responsibility. Introduced as a software to increase producers’ duty over the life-cycle of a product and promote a extra round financial system, the coverage goals to cut back the entire environmental prices of a product by partaking firms to kind their manufacturing and finish product waste.

An enabling atmosphere is critical for MSMEs to interact in inexperienced enterprise efficiently. These enterprises usually have higher flexibility than bigger corporations and might generally undertake new applied sciences extra rapidly. 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 must be geared up with the fitting public schooling measures.

The Path Forward

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 function in serving to Indonesia attain its bold local weather targets.

MSMEs supported Indonesia’s restoration efforts from the COVID-19 pandemic, and their function could 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 might be essential in collectively fixing our future local weather challenges.

The article was written with assist from Horionsah Hasan, First Secretary for Economic Affairs on the Indonesian Embassy, accredited to Denmark and Lithuania. 

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