By Avishek Gupta
Sustainability for MSMEs – Businesses or startups that balance social impact and sustainability, along with financial profitability are key contributors to employment generation and long-term sustainable economic growth. Such enterprises, which are driven by a larger social change agenda, intentionally try to achieve social objectives with financial objectives. They strive to address social and economic challenges such as climate change, women’s empowerment, sanitation, affordable housing, primary healthcare, financial inclusion and skilling through innovative, scalable and sustainable solutions that reach underserved populations and solve complex problems rather than focusing only on superficial problems. Their emphasis is on marrying profits and purpose for building a better world.
One could argue that all MSMEs contribute to society and the economy by creating jobs, producing goods and services, paying taxes and contributing to the overall GDP growth. The key differentiator for socially driven MSMEs from the rest of the MSMEs is that they are intentional about solving critical social and environmental challenges through for-profit operations. This also differentiates them from NGOs who solve this problem through non-profit approaches and are dependent on grants. These organisations are also different from CSR projects run by SMEs and companies because unlike CSR which is carried out as one-off activity required for compliance, socially driven MSMEs’ core business is to solve challenges through for-profit approaches.
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These organisations tend to be more resilient as their existence is important to the communities they are serving. However, they also need more time and hence patient investors to achieve the scale that will provide long-term predictable returns.
There is an increasing body of evidence that companies which espouses shared values by balancing the interest of all their stakeholders including shareholders, employees, customers, communities, and the environment are likely to outperform the market in the long run. Capital is an important instrument to drive any change and all investors can play their part by increasing the flow of capital to socially driven MSMEs. This will also encourage enterprises and startups, in general, to find ways to achieve their long-term sustainability and attract capital by changing their current policies and practices to embrace sound environment, social and governance practices.
Over time, due to the growing awareness about global issues and challenges created by unprecedented scenarios such as Covid, the focus of investors and enterprises has been shifting towards doing the right thing, by choosing to invest in more impactful sectors that are guided by affirmative actions and measuring of results which are not just financial. However, how does one measure and assess the performance of socially driven MSMEs? While financial performance indicators are easily quantifiable and there are accepted metrics to measure how well a company is doing, measures of assessing and benchmarking impact in a common indicator become difficult.
How can one compare one unit of the impact of educating a girl with that of providing primary health care to a low-income household? While this debate on impact measurement continues, the focus is required on “which” -i.e. sectors, “who” – is getting benefitted, “how” – transparent policies and processes of implementation and “what” is being achieved is very important. The means of achieving the end are equally important as the end itself.
Also read: ESG adoption can help MSMEs play big role in reducing carbon emissions: Experts
The lowest common denominator, to begin with, is “do no harm” and “no discrimination”. All in all, this type of investing is more complex than the profits-only investment approach but surely leads to a better economy and predictable returns. The investment firms that generally hire quality talent should be able to deal with the complexity. Why should so much intelligence and talent focus on simplistic metrics like financial returns to gauge the return on investment?
In conclusion, investing in socially driven enterprises or startups is an important strategy for investors and a key to enabling a robust economy. It is a great way to support positive social change while generating financial returns. These businesses play a vital economic role and can create significant impacts, particularly in sectors where formal employment and economic opportunities are limited. By investing in these businesses, investors can help to support sustainable development, mitigate risk, and drive systemic change. This would ultimately result in the economy being better and potentially making the market more attractive for larger investors interested in investing in funds, increasing business for the fund manager.
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Avishek Gupta is the Managing Director & CEO of Caspian Debt. Views expressed are the author’s own.