Climate change: Should MSMEs pay for Western world’s target of achieving net-zero emissions?

October 24, 2021 12:32 PM

Ease of Doing Business for MSMEs: MSMEs face several roadblocks on the path to net-zero. Many of them do not own their facilities, making it difficult to upgrade to an energy-efficient system, nor do the landlords want to make these investments.

India is home to 6.3 crore MSMEs. It is only with the active participation of MSMEs, the race to net-zero can be won.
  • By Utkarsh Majmudar

Ease of Doing Business for MSMEs: Recent floods in the US and Germany, droughts in Africa, and forest fires in Australia have all been ascribed to climate change. These cause significant disruption to businesses. Much of climate change is a result of greenhouse gas (GHG) emissions from factories. The Paris Agreement in 2015 outlined the need to restrict global warming to 1.5 degrees Celsius. Our planet must be net-zero to achieve the Paris Agreement goals. In simple terms, net-zero is the balance between the quantity of greenhouse gas produced and the amount removed from the atmosphere.

There are two ways to achieve net-zero – either reducing GHG production or taking GHG out of the atmosphere by capturing carbon created during production processes or planting more trees.

The Industrial Revolution, which started in Europe and moved to the US, brought about a radical change in people’s lives. An argument is often made that the western countries that were industrialised earlier did not realise the impact of emissions and their economic progress came at the planet’s expense. Now, at the time when developing countries are progressing economically, their emission levels are getting scrutinised.

Carbon tax and other trade policies are being implemented that could reduce the role of developing countries in global trade and constrain their economic progress. However, the developed countries are prosperous and have the resources to afford net-zero targets. On the other hand, less developed countries cannot afford the expenditure required. Nor do they have the technological capability for achieving net-zero targets. Thus, the developed nations should pay for the rest of the world.

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There is a counterargument that the planet belongs to everybody – not the western world alone. The aftereffects of global warming will spare none. The responsibility to save the planet falls on every nation. The burden is not of the developed nations alone. Inarguably, the western world has greater resources-both financial and technological. The time window for mitigating climate risk is shrinking fast. Net-zero targets need to be achieved by 2050 or earlier. Developing countries need to start getting their act together and not wait for developed countries to pitch in. When resources and technology become available from the western world, it would help speed up the race. The race to net zero can only be won by everyone coming together.

Production activities of companies are a major source of GHG emissions. Achieving net-zero requires a concerted effort by all companies. Just like the western world is at an advantage, large companies are at a relative advantage with access to both technology and finance.

India is home to 6.3 crore MSMEs. It is only with the active participation of MSMEs, the race to net-zero can be won.

While small is beautiful, but not when it comes to net zero. For a small or mid-sized company, the journey to net-zero can be challenging. Many of the MSMEs are part of supply chains. They also act as a supplier base for larger companies. Thus, bigger companies have a role and responsibility to help the smaller ones reduce their individual and collective carbon footprint.

MSMEs face several roadblocks on the path to net-zero. Many of them do not own their facilities, making it difficult to upgrade to an energy-efficient system, nor do the landlords want to make these investments. MSMEs cannot afford a dedicated person to look after environmental issues, unlike large companies with dedicated teams. By complying with regulations in place, they just about manage to get by. Another challenge for smaller companies and entrepreneurs is to receive adequate training on sustainability to help them set and achieve sustainability goals. While these issues are not peculiar to developing countries, they become more relevant.

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A multipronged approach is required in getting MSMEs to achieve net-zero targets. First, the large buying companies must take their supply chain participants under their fold. They can support them by providing financial support in the form of loans and grants. MSMEs can also provide education and training in setting net-zero targets and mechanisms for achieving them. Several online tools can help MSMEs measure and track their carbon footprints. Second, the government needs to support MSMEs by providing tax benefits and subsidies to support their shift to net zero. Finally, NGOs and other agencies can support MSME in their endeavour to achieve net-zero.

Another critical link in the achievement of net-zero targets is logistics. Transportation provides a critical role in making the supply chains work. Decarbonising logistics through all elements of freight, delivery centres, and last the mile delivery will impact GHG emissions.

Larger companies thinking about decarbonising their supply chains and achieving net targets can focus their attention on:

  • Creating transparency: This can be achieved by building baseline data on emissions and exchanging information with suppliers. They can help suppliers set their scope 1, 2, and 3 targets. 
  • Optimising for GHG emissions: The products can be redesigned for sustainability while simultaneously designing the value chain and sustainable sourcing strategy. 
  • Engaging suppliers: This can be done by integrating emission metrics in procurement and tracking performance. Larger companies also need to work with suppliers to address their sustainability issues. 
  • Building the ecosystem: Create an ecosystem that values sustainability and creates a culture for best practices, certifications advocacy, etc. 
  • Creating governance structures: A governance structure that aligns internal incentives to push supply chain sustainability.

There are enough mechanisms to ensure that achieving net-zero targets is not a burden on western countries alone. The planet belongs to each one of us, and it should be everybody’s responsibility to fight the climate crisis. MSMEs have a critical role in ensuring a sustainable world with larger companies that can help the smaller companies in their collective quest for net-zero.

Utkarsh Majmudar is a member of the Board of Governors at IIM Raipur. Views expressed are the author’s own.

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