What is the Impact of SMEs on Climate Change?

The world is being plagued by a global pandemic, climate change, biodiversity loss, rising demand for food and scarcity of natural resources, to name a few. Our irresponsible consumption and production of SMEs are the root causes of humanity’s multifarious problems.

The traditional consumption and production process is based on a linear economic system that follows the “take-make-use-waste” resource utilisation pattern. The circular economic system is an alternative to the linear economic system since it utilises resources in a restorative and regenerative manner, resulting in no waste. That is, the circular economy is a model of consumption and production that focuses on reducing, refurbishing, recycling, and reusing resources — benefiting both the economy and the environment.

The World Resource Institute (WRI) postulates that we can cut global greenhouse gas emissions by 39 percent (22.8 billion tons) simply by implementing circular strategies in our existing linear consumption and production process. The Washington-based think tank also estimates that the circular economy offers USD 4.5 trillion worth of economic opportunity through sustainable economic growth.

Numerous economic entities are involved in our consumption and production process. All economic actors need to embrace circular thinking to unleash the power of a circular economy in terms of socio-economic and environmental benefits. The World Bank (WB) estimates that small and medium-sized enterprises (SMEs) account for more than 90 percent of businesses worldwide. Hence, SMEs have a crucial role in implementing a carbon-neutral (impact of SMEs on Climate Change) circular economy as an integral part of our economy.

SMEs have enormous economic and environmental impacts as a group, though individually, their impacts are small in most cases. Moreover, SMEs have vertical and horizontal linkages with large enterprises. Such connections make SMEs strategically important to a true circular transition.

Generally, being more malleable than their larger counterparts, SMEs are more likely to adopt circular business practices. Nevertheless, SMEs face many capacity constraints because of their size, whereas the capacities of large enterprises facilitate the acceptance of and realisation of returns from a circular economy-based business model. Some critical limitations include limited access to finance, lack of knowledge and understanding of the circular economy, the dearth of technical and managerial capacity, and the absence of an SME-friendly regulatory framework.

Of course, there is no single way to support SMEs to surmount these obstacles. Through collective transition efforts, SMEs can integrate circularity into their operations; all they need to know is what(impact of SMEs), why, and how to do so. This is where business leaders, financiers, policymakers, international development agencies, and other stakeholders come in. So, how can corporations finance the SME circular transition?

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In most instances, large corporations can finance the circular transition internally through their retained earnings or other internal sources of finance, whereas SMEs are often dependent on external financing to design, manufacture, and use products in a circular way. Unfortunately, many financiers aren’t acclimated to the correct assessment of the risks and opportunities associated with circular project financing. By formulating a circular economy financing strategy to improve understanding and knowledge of circular economy concepts among banks and other financial institutions, we can bridge the financing gap in SME circular projects.

Thanks to technological advances in both recycling and upcycling, we have an opportunity to leapfrog to a circular economy now. However, because of the upfront costs of installing circular technologies, most SMEs may not find it financially feasible to overhaul their current linear business models. That is why we need to make technologies more accessible and affordable for SMEs to redesign their manufacturing processes to increase reuse of industrial waste potential and recyclability.

We all know that SMEs, particularly start-up SMEs, are receptive to new ideas and innovations. Initiating reforms in the ease of doing business will help attract foreign direct investment (FDI) as well as circular management skills and expertise from multinational enterprises to our local SME landscape. Then, how can Policymakers promote circularity practices in the SME industry?

A regulatory framework for the circular economy is imperative. Policymakers should come up with a streamlined and SME-friendly regulatory framework to promote circularity practices among our SMEs. For instance, we may reward eco-inclusive SMEs through tax breaks, subsidies, and other financial incentives for a systemic transformation.

Finally, to foster the uptake of circularity systems among SMEs, awareness of the circular economy is a must. Appropriate policy initiatives to raise awareness about responsible consumption and production will invigorate the acceptance of circular business models among SMEs and impact of SMEs. Finland, a global forerunner in the circular economy, has already taken such an initiative — called the “Program for the Promotion of Low-Carbon, Circular Economy and Digital Transformation”, to encourage SMEs to accept circular economic approaches.

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