Small and medium-sized enterprises (SMEs) are the backbone of the economies of emerging markets, contributing significantly up to 40% of national income to GDP. These enterprises have substantial potential to lead climate action through sustainable practices and green technologies. However, accessing climate finance remains a critical obstacle. Despite the fact that over US $850 billion was mobilised globally in climate finance in 2023, a minuscule portion reaches SMEs in emerging economies, hampering their global transition towards a net-zero future.
Emerging markets, such as India, Indonesia, and Nigeria, are experiencing severe climate risks, including floods and droughts caused by rising sea levels. These risks directly impact their economies and vulnerable populations. SMEs in these regions often lack the resilience and resources to adapt to such disruptions, exacerbating their challenges and addressing the finance gap. The International Finance Corporation (IFC) has highlighted that financing needs for climate action in emerging markets range between US $1.7 trillion and US $3.4 trillion annually by 2030, which is crucial for empowering SMEs to contribute to climate mitigation and adaptation, ultimately fostering a sustainable and resilient future for emerging markets.
While SMEs hold immense potential to drive climate action in emerging markets, they face numerous challenges that hinder their ability to access the necessary finance and implement sustainable solutions effectively.
Barriers to accessing climate finance for SMEs in emerging markets
SMEs in emerging markets encounter significant hurdles that restrict their ability to effectively access and utilise climate finance due to various reasons like:
- Mismatch in funding size: Climate finance initiatives often focus on large-scale projects, leaving SMEs unable to access appropriately sized funding. For example, a study by the Climate Bonds Initiative found that less than 10% of green bond proceeds in 2023 were allocated to small-scale projects
- Data gaps and lack of transparency: A persistent lack of reliable data on climate risks and opportunities undermines investor confidence. The absence of clear taxonomies for green investments complicates the decision-making process for both investors and SMEs
- Knowledge gaps: A lack of awareness about climate finance options and sustainable business practices further deters SMEs from seeking green financing. According to a 2023 report by the IFC, 70% of SMEs in emerging markets are unaware of climate finance opportunities
- Perceived risk: Financial institutions often view SMEs as high-risk borrowers due to their limited credit history, lack of collateral, and vulnerability to market fluctuations. Economic instability and regulatory uncertainties amplify this risk perception in emerging markets
- Complex application processes: Many climate finance mechanisms, including green bonds and international funding programs, involve intricate application procedures and stringent compliance requirements. SMEs, especially in developing countries, lack the expertise and resources to navigate these processes
Addressing these challenges requires innovative and targeted approaches that consider the unique circumstances of SMEs in emerging markets. By implementing tailored solutions, these businesses can overcome barriers and unlock their potential to drive meaningful climate action.
Solutions to overcome the barriers faced by SMEs
Targeted interventions and innovative strategies can empower SMEs to drive sustainable development effectively, which can be seen as:
- Tailored climate finance strategies: Nigeria’s rural electrification agency’s energising economies Initiative focuses on providing off-grid solar solutions to SMEs in markets and industrial clusters. By 2023, this initiative had reduced energy costs for over 1,000 businesses, enhancing their productivity and profitability. The Dutch Fund for Climate and Development mobilised $160 million through blended finance for small businesses in Sub-Saharan Africa, providing affordable loans for solar energy projects
- Role of microfinance and fintech innovations: Companies like M-KOPA in east africa use pay-as-you-go models to provide clean energy solutions to low-income households and SMEs. By leveraging mobile technology, M-KOPA has connected over 3 million customers to solar power since its inception
- Public-private partnerships (PPPs): The Indian government collaborated with private players to scale up renewable energy projects like the Solar Energy Corporation of India (SECI) have mobilized substantial private investment, demonstrating the potential of PPPs to reduce financing gaps as seen from November 2024 data that total renewable energy capacity of India’s total non-fossil fuel installed capacity reached 213.70 GW, marking a 14.2% growth from the previous year
- Enhancing SME access to climate finance: Developing standardised taxonomies for green investments can improve data quality and build investor confidence, as highlighted by initiatives from the UNFCCC, which has aligning policies, such as phasing out fossil fuel subsidies and promoting renewable energy incentives
- Efforts by various stakeholders: The capacity-building programs supported by governments, NGOs, and international organisations equip SMEs with the skills to develop viable green projects and integrate climate resilience into their operations
Implementing these solutions can help bridge the existing gaps in climate finance, enabling SMEs to overcome barriers and play a pivotal role in driving sustainable growth.
Conclusion
SMEs in emerging markets are critical to economic growth and climate action but face significant barriers in accessing climate finance; despite substantial global climate finance, only a small fraction of climate finance share is accessible to SMEs due to struggle with their data gaps, limited knowledge, and high perceived risks. To unlock climate finance for SMEs, strategies must be tailored according to the need and demand of the situation, such as Nigeria’s Energising Economies Initiative, and involve blended finance approaches like those from the Dutch Fund for Climate and Development. Public-private partnerships and enhanced data transparency are essential to align policies, build capacity, and facilitate access to finance, enabling SMEs to play a meaningful role in climate mitigation and adaptation efforts. Thus, these initiatives address systemic barriers, empowering SMEs to contribute meaningfully to climate mitigation and adaptation.
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