India’s MSMEs Are Turning Green From The Ground Up

Mumbai-based Leap India, which builds and operates warehouses for storing farm produce, offers its customers reusable packaging products such as pallets, crates and containers, reducing their reliance on single-use materials like plastics and paper. Leap India is not the only company—classified among micro, small and medium enterprises (MSMEs)—that’s embracing green and following a sustainable business model. According to a survey by the Small Industries Development Bank of India (SIDBI) released in May, out of 2,097 MSMEs surveyed across 19 sectors, one-third have adopted some form of sustainable practices. While 31% have switched to energy-efficient lighting and machinery, 21% have adopted renewable energy sources, says the report. These MSMEs have acted at least partly under pressure from the Securities and Exchange Board of India (Sebi), the market regulator, and government initiatives to promote ESG, or environmental, social and governance, standards. To be sure, ESG adoption among MSMEs is still at an early stage—often limited by capacity and awareness gaps, and resource constraints. That can no longer be an excuse for inaction by the MSMEs, which play a vital role in the economy, their presence cutting across sectors ranging from agriculture to automobile components, contributing 30% of gross value added, 45.7% of exports and employing 260 million people, according to the latest available figures. Starting Small Increasingly, investors and foreign businesses are using yardsticks like ESG to assess the impact their partners leave on the environment and society at large, making it crucial for MSMEs to embrace and adopt an ESG framework. For MSMEs, starting small and building on existing processes will lead to both efficiency and value, says Shailesh Tyagi, Partner in the sustainability and climate practice at Deloitte India. “ESG is no longer optional; it is becoming the blueprint for long-term value,” he says. Sebi’s initial ESG mandate came into effect in financial year 2022-23 (FY23), requiring the top 1,000 listed companies by market capitalisation to file Business Responsibility and Sustainability Reports (BRSR). In FY24, the regulator went a step further by directing the top 250 listed companies to begin supply chain ESG disclosures, covering 75% of their suppliers. Companies promptly raised a raft of red flags. Smaller companies lack ESG reporting capacity, went one complaint. Some flagged concerns over the burden of third-party verification and said the cost of complying with ESG standards was too high for companies already battling capital constraints. Responding to these concerns, Sebi deferred the supply chain reporting timeline to FY26. What’s Going Right? Some large industries like automotive, textiles, fast-moving consumer goods and information technology are already actively moving towards implementing ESG standards, says Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small &amp; Medium Enterprises. Meanwhile, MSMEs have been trying to comply with softer aspects of ESG like reducing emissions by switching to solar power and other non-conventional energy sources, Bhardwaj adds. “Many MSMEs are now implementing simplified ESG frameworks like BRSR Lite to showcase sustainability practices and are collaborating with larger companies who are supporting sustainability among SMEs through ESG toolkits, templates and training to navigate reporting complexities,” says Vinod Kumar, president of the India SME Forum. Initiatives like Project Savannah, aimed at empowering MSMEs in their ESG reporting, are equipping companies with digital credentials and standardised tools to measure compliance, Kumar says. MSMEs are also receiving green certification and leveraging technology and financial support from government and state initiatives, he adds. To tackle greenhouse gas emissions by MSMEs, the government launched two schemes under its Raising and Accelerating MSME Productivity programme in December 2023. Several larger organisations have already started supporting MSMEs. “Our partnerships with companies like Pointo, 3Ev and Urja Mobility involve battery leasing models that are both economically viable and environmentally sustainable, benefiting all stakeholders,” says Pratik Kamdar, Co-founder and Chief Executive Officer of Neuron Energy, an MSME that makes batteries to power electric vehicles. “In addition, some OEMs (original equipment manufacturers) are taking proactive steps by sharing audit templates, reporting tools, and training resources to help MSMEs meet ESG compliance requirements,” Kamdar added. Challenges in ESG Implementation Even so, awareness of ESG among MSMEs is limited and implementation of the guidelines remains a significant challenge. MSMEs are not yet mandated to comply with ESG regulations, and are confused about which standards to follow, how to prepare disclosures and what timelines to meet, says the SIDBI survey. Data collection and digital technology are other limitations. “Data is very fragmented as industries have many facilities and there has to be a process in place to capture data and consolidate it in a systematic way,” says Akash Keshav, Co-founder and CEO of Sprih, an ESG consulting firm with over 20 MSME clients. “Also, digital tools and monitoring systems essential for tracking ESG metrics aren’t so affordable or accessible for many MSMEs.” Limited finances and resources to implement ESG standards have already put pressure on MSMEs in export-dependent industries like textiles and pharmaceuticals, whose customers in the US and UK, for instance, lay great store by such norms, says R. Sakthivel, founder &amp; CEO of textile maker Daffodil and a member of the board of Tiruppur Exporters’ Association. “It’s very difficult, as unlike big companies, we don’t have an ESG set-up and, hence, our margins have also been suffering due to this,” Sakthivel says. The Way Ahead Sure, some policy changes can help MSMEs in the transition towards full implementation of ESG standards. These include simplified ESG reporting standards that focus on material indicators tailored specifically to MSMEs. The effort can begin with leveraging affordable digital solutions and centralised, user-friendly platforms that automate ESG data tracking, reporting, and self-certification that minimise manual work, says Kumar of the India SME Forum. Encouraging group reporting or a cluster-based approach can also reduce individual costs. Additionally, allowing MSMEs to begin with self-assessments or third-party evaluations rather than filing expensive full audits can significantly lower verification costs without compromising data credibility, Kumar adds. Siddharth Manchanda, Partner at IndusLaw, suggests a sectoral classification of ESG norms given that MSMEs cut across industries. Sebi can work with other regulators to prescribe compliance parameters for different industries. If India can empower its MSMEs, there’s a big opportunity awaiting it. “As global supply chains get reconfigured because of ongoing geopolitical shifts, India has a unique opportunity to move away from the traditional sources of competitive advantage—low labour and input costs—by focusing on green manufacturing,” says Namrata Rana, Partner, National Head ESG, KPMG. This needs a value chain focus that encompasses not just the top companies, but their extended supply chain consisting of hundreds of MSMEs. @Riddhima76

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India’s MSMEs Are Turning Green From The Ground Up

Increasingly, investors and foreign businesses are using non-financial yardsticks like ESG to assess the impact their partners have on the environment and society, making it crucial for MSMEs to embrace and adopt acceptable standards.