SMEs need strong access to green financing to drive recovery from pandemic

The Philippines and other countries can pursue green financing strategies to secure business continuity of small and medium-sized enterprises (SMEs) which can help drive a recovery from the pandemic.

Asian Development Bank (ADB) principal financial sector specialist Arup Kumar Chatterjee said SMEs, which make up over 96 percent of all Asian businesses, need strong access to such financing to make green recovery and “building back better” approach work.

“These small enterprises can make a good business case for going green, including to boost resilience, reduce costs, and raise productivity, and thus support climate change mitigation and adaptation. But they need fine-tuned support to do so,” he said in a blog.

Chatterjee cited the impact of climate change on these businesses needing immediate attention as they are highly vulnerable to climate-related shocks and diversity loss in capital, labor, logistics, and markets.

“These shocks can disrupt supply chain networks and operations and damage assets, installations, and inventories. This raises production costs and reduces revenues,” he said.

Likewise, SMEs tend to leave a big carbon footprint as these businesses lack investment in climate smart technology and are less regulated than large enterprises, he added.

“Even climate-related disasters seriously inhibit their development. They have limited capacity to recover from these extreme events and to rebuild operations, revenue, and profit. They lack sound risk management, business continuity, and crisis management cultures,” Chatterjee said.

“Under these conditions, COVID-19 (coronavirus disease 2019) has left many SMEs in the red and more focused on survival than on going green,” he said.

To help these businesses, Chatterjee underscored the importance of having more financial institutions offering long-term capital for the sustainable financing needs of SMEs.

He said public financial institutions, such as state-owned development banks, can support SMEs’ broader green banking environment via direct financing through low-cost credit lines linked to targeted green lending programs.

“They can establish public-private partnership facilities, seedingclean technology funds and refinancing. Moreover, they can help unlock capital for startups and SMEs through liquidity-support instruments, such as green loan guarantees. Such measures can translate into the highest long-term multiplier effect available on economic growth, energy, and resource efficiency,” he added.

Moreover, Chatterjee said green bonds also offer a range of sustainable financing options, including from banks that aggregate and securitize SME loans into asset-backed securities.

He said fintech-enabled green finance solutions for SMEs can help improve efficiency of capital intermediation by lowering risk for financial institutions and reducing transaction burdens.

“This can reduce SMEs’ capital costs and incentivize them to deliver sustainability. It can also ease the granting of green credit, harnessing new data and information sources, or supporting collective action among SME stakeholders to build sustainable supply chains,” he added.

Chatterjee said another helpful instrument is private insurance against climate losses.

“It can protect SMEs from devastating storms, drought, higher sea levels, and environmental damage. And small businesses with broad insurance coverage recover faster from the financial impacts of extreme events,” he said.

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