Indian MSMEs are embracing ESG measures with surprising gusto as they look to integrate into global value chains, which are driven by demands from multinational partners and regulatory changes
An NCR-based chemical maker with an annual turnover of less than 100 crores recently approached Sculpt Partners, an advisory firm focused on sustainability, for an environmental, social, and governance (ESG) assessment. The request came from one of its customers, a major domestic manufacturer supplying rubber to global tyre companies such as Yokohama and Michelin, who wanted to understand the chemical maker's plan for reducing carbon emissions.
There is currently no regulation requiring the chemical company, which falls under the micro, small, and medium enterprises (MSME) category, to have a decarbonisation plan. However, the need arose because it is a value chain partner of a multinational company that is obligated to report the carbon impact of its partners.
This situation is not unique. Many Indian MSMEs, especially those engaged in exporting, are being asked by foreign customers to provide ESG reports as part of the bidding process.
The carbon footprint of MSMEs, which contribute over 30 percent to India’s GDP and are responsible fornearly 45 percent of exports, is significant, accounting for 3-4 percent of the country’s total carbon emissions, according to a report by the NITI Aayog.
Given this, it is becoming increasingly crucial for value chain partners of listed and export-oriented entities to make the transition. MSMEs in the automotive, leather, and textiles sectors have started collecting emission data, utilising solar energy for operations, implementing measures for water and energy efficiency, and improving waste management.
According to Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small & Medium Enterprises (FISME), these efforts are currently limited to specific industries, and more coordinated action is necessary for the decarbonisation journey of MSMEs.
In India, a regulatory push has initiated some action. The Securities and Exchange Board of India (SEBI) has taken the lead with its Business Responsibility and Sustainability Reporting (BRSR) Core framework. Starting from fiscal year 2025, the top 250 listed companies by market capitalisation must disclose value chain information under this framework on a comply-or-explain basis. From fiscal year 2026, they will need to provide limited assurance, a less stringent form of third-party validation of value chain reporting.
The industry bodies are handholding SMEs in this transition. The CII-ITC Centre of Excellence for Sustainable Development (CII-CESD), which provides advisory services, is currently engaged with more than 600 value chain partners and MSMEs in 10 industrial clusters to achieve sustainability through its ESG intelligence and analytics services, which include capacity building, ESG assessment, advisory, and reporting.
There are other such examples as well. The Energy Consortium, an umbrella energy research initiative at IIT Madras, is helping MSMEs conduct energy efficiency assessments free of charge and recommends changes to improve it.
It has conducted 150 such assessments across sectors, but the highest interest as of now is seen in export-oriented industries such as textiles and leather.
The consortium is also working on building an ESG reporting framework for MSMEs to generate data related to the sector.
One factor that needs to be considered when looking at the transition is the amount of money these costs. Many small firms might find it hard to access such funds, and hence, monetary incentives will be required in the form of cash, tax credits, easy lending from banks, and relaxing credit guarantees.
These are some of the issues flagged by FISME.
MSMEs seem to be very keenly aware of the need to make the transition. A survey by DBS Bank and Bloomberg Media Studios completed in November 2022 found that almost all such firms (92 percent) are focused on adopting ESG measures to be part of the global value chain. However, 57 percent face challenges like the cost of deployment of ESG initiatives.
Rohan A. Shah, Director of professional services firm PwC India, says there are other challenges beyond financing as well. These include limited awareness and capacity, resource constraints, compliance burdens, and market access and recognition.
Beyond these initiatives, some listed entities are taking the onus and working with their value chain partners to help them in their transition journey. PwC’s assessment of publicly accessible BRSR reports of the Top 100 companies in FY24 found that 62 percent of companies provided training on key ESG issues to their value chain partners. In contrast, 54 percent of companies assessed their value chain partners against environmental indicators.
Many MSMEs, too, are working proactively to cut emissions at their end. According to PwC, MSMEs are innovating products and services, keeping sustainability in mind,thereby driving value chain decarbonisation. For instance, engineering MSMEs are developing energy-efficient machinery and equipment that consume less electricity and produce lesser emissions during operation.
Similarly, agro-processing MSMEs are introducing eco-friendly packaging solutions made from biodegradable or recycled materials, reducing the carbon footprint of packaging and distribution activities. By offering sustainable products and solutions, these MSMEs catalyse broader shifts towards decarbonisation across value chains.
Textile MSMEs are adopting closed-loop production systems where discarded garments are collected, recycled, and reintegrated into the production process.