Amid tough market conditions, smaller players are likely to pick survival over sustainability. Can the industry change that?
-by Kelvin Teo
Kelvin Teo is the Co-founder and Group CEO of Funding Societies | Modalku, the largest SME digital financing platform in Southeast Asia.
2023 is in swing, and with the worst of Covid-19 over, companies around the region are striving toward pre-pandemic business-as-usual as quickly as they can muster.
But having been buffeted by economic headwinds across the past two years and counting, recovery is proving slow for small and medium-sized (SME) firms. Without coffers as deep as their multinational counterparts, nor strategies as robust, SMEs’ top priority –now more than ever– is to survive.
This could spell bad news for global momentum around sustainability. A survey1 of 800 SMEs conducted last year by DBS and Bloomberg Media Studios found that SMEs across six Asian markets, including Singapore, are struggling to transition to more sustainable models while balancing business growth, even as they acknowledge ESG a priority.
Among the challenges cited were a lack of funding, expertise, and standardised reporting. These findings were corroborated by a UOB survey of 800 Singapore SMEs2, which identified more barriers, such as inadequate support in areas like sustainability training.
With few legal obligations and no immediate financial upside to ESG adoption, the pull toward survival over sustainability is expected to intensify for smaller players amid tough economic conditions.
But SMEs, which form the backbone of Southeast Asia’s economy, should not be left out from the ESG agenda. According to the International Federation of Accountants3, this group of firms comprises as much as 89–99% of businesses in the region, and 30–53% per of each country’s GDP.
Thus far, major stakeholders like governments and corporates have led regional ESG efforts. But as climate change barrels forward, addressing SMEs’ challenges and creating avenues to help them adopt responsible practices at this juncture could be what the industry needs to achieve climate targets.
All about the money
How can the wider industry smoothen the sustainability journeys of the bulk of the region’s businesses?
One method is to incentivise through more lending schemes or benefits tailored for SMEs. An example: Singapore’s Enterprise Financing Scheme Green4, which sees the government share 70% of lending risks with financial institutions to encourage funding of SME solutions that reduce waste, emissions, or resource use. Within 10 months of launching the scheme in 2021, 19 firms borrowed close to S$60 million5.
But the bulk of market schemes are designed for firms with the capacity to capture ESG data. To accommodate SMEs’ unfamiliarity with ESG reporting, players such as digital financing platforms can capitalise on the opportunity to cater to SMEs – particularly those without the size and credibility to access traditional financing.
Such platforms not only have more flexibility to experiment on the types of products best suited for SMEs’ sustainability projects, but are also in a position to tailor products according to ESG data available to SMEs, and ensure requirements are not excessively stringent. For example, an IT firm might be exempted from submitting data around sustainable resource management, compared to a manufacturer.
Digital financing platforms also play a key role in educating SMEs on the tradeoffs of ESG neglect. With sustainability-focused European investors increasingly looking to finance Southeast Asian markets, SMEs with no systematic way of collecting or interpreting ESG data may be excluded from funding, or receive smaller sums.
To mitigate this, platform lenders can prep SMEs through outreach and education. Funding Societies, for example, surveys SME borrowers on their ESG maturity as part of the loan application process, to help them realise ESG is an increasingly critical criterion.
Financing firms can also facilitate client sharing on best practices to help SMEs elevate their business and secure more funding, including from corporates.
Positive pressure
Speaking of corporates, many of Southeast Asia’s SMEs are suppliers to multinationals in the US and EU, which are markets with more stringent ESG benchmarks and a heavy emphasis on green supply chains.
In this vein, the ESG roadmaps of big players can exert positive pressure on supplier SMEs, exposing them to concepts such as sustainable manufacturing. To go one step further, corporations too can showcase success stories among suppliers that prove SMEs can be green, and still grow.
Cascading ESG knowledge down the value chain could also better prepare SMEs for new regulations. While demand for ESG disclosures has been largely focused on major players, regulators are increasingly expanding this scope.
The Singapore Exchange (SGX) in 2022 mandated climate reporting for listed companies, while the Monetary Authority of Singapore last year launched a portal for companies to report ESG data, adding that it would use learnings from the project to address the reporting needs of business, particularly SMEs6.
While regulations are certain to ramp up ESG pressure, this should be accompanied by assistance to help SMEs build capability. As they struggle to integrate large goals like decarbonisation into day-to-day operations, regulators can break down concepts into focus areas — for example, “reduce plastic”— and supply practical next steps.
Indonesia’s KADIN Net Zero Hub, for example, helps the nation’s SMEs and corporations roadmap to net zero, while new institutions such as the Singapore Green Finance Centre aim to develop a pipeline of green finance talent.
One greener company may not tip the scale, but SMEs form the bulk of Southeast Asia’s economy and have immense collective impact. Lenders, corporates and governments should wield their considerable influence to oil the ESG transitions of this group. In doing so, they’re making a significant difference to the future of the region, and the world.
To read it on The Business Times, click here.
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1 https://www.dbs.com/NewsPrinter.page?newsId=l98dqx3i&locale=en,
https://www.dbs.com/newsroom/DBSHK_SMEsurvey_EN,
https://www.dbs.com/newsroom/92_percent_of_Indian_SMEs_are_focused_on_adopting_ESG_measures
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