Future Proofing Indian MSMEs: Building a Business Case for Energy Efficiency

Despite being hamstrung by several challenges, including limited access to finance, technology, and skilled labour, small, and medium-sized enterprises (SMEs) contribute around 30 per cent to India’s GDP and 40 per cent to its exports. Adopting energy efficient practices, advanced technologies and renewables could propel them to even greater heights by enhancing their competitiveness, reducing costs, and opening new markets. A recent CSTEP study shows that by embracing sustainable practices, MSMEs could save 136,581 tonnes of CO2 annually and reduce energy costs by Rs 370 million.

Such data-points prove that the business advantage of adopting sustainable practices is substantial. Highlighting this fact can spur SMEs across India’s domestic markets and supply chains to embrace such practices and measure up to the stringent sustainability mandates in export markets.

Mirroring global trends, India is witnessing a growing demand from consumers for eco-friendly products and an increasing preference among large corporates for suppliers adopting sustainability practices.

Regulatory frameworks like the Business Responsibility and Sustainability Reporting (BRSR) require larger Indian companies to report their ESG metrics, including the sustainability standards of its suppliers. Aligned to the evolving market trajectory, voluntary global initiatives like the UN High-Level Climate Champions’ Race to Zero Campaign, offer SMEs a platform to enhance their brand and position themselves as climate leaders.

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Studies indicate that many Indian SMEs across manufacturing, construction and consumer goods are leveraging energy efficiency, waste reduction, and water management in their operations and reaping rich rewards, ranging from cost savings and operational efficiency to enhanced access to markets.

Emphasising climate action commitments through international initiatives, certifications and transparent reporting, builds brand reputation and positions them as resilient, innovative, and future-ready players, both locally and in potential export markets.

Access to green financing is also expanding in India through mechanisms like Priority Sector Lending and government subsidies, which offer MSMEs financial tools for climate action. SMEs can also benefit from government schemes like Production Linked Incentives (PLIs) and sector-specific green policies that encourage climate positive investments and create pathways for them to integrate sustainability into their operations.

Overall, while market trends indicate a clear direction, it is critical that all key stakeholders take decisive, coordinated action to unequivocally strengthen the business case for sustainable practices. Key recommendations for cross-ecosystem support include:

Policy-Level Interventions

• Mandatory Climate Reporting: Give higher rank to SMEs disclosing their carbon footprint and sustainability measures while bidding for government contracts to drive accountability and improve transparency.

• Schemes for Green Investments: Promote schemes for supporting SME access to investments in renewable energy, energy-efficient equipment, or waste management technologies.

• Sector-Specific Subsidies: Provide targeted subsidies for industries with a high environmental impact, such as textiles, construction, and food processing to encourage adoption of cleaner practices.

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Finance-Level Recommendations

• Awareness of Green Loans: Strengthen SME awareness campaigns on green financing from government and private sector schemes and make the process compatible for online applications. 

• Climate-Linked Credit Scores: Encourage financial institutions to integrate climate action metrics into credit assessments to incentivise climate action.

• Adaptation of Financial Tools: Expand the use of existing tools like risk insurance and climate-resilient financing to protect SMEs in regions prone to climate impacts.

Programme-Level Interventions

• Subsidised Energy Audits: Encourage SMEs to take up energy audits and link subsidy to implementation.

• Shared Renewable Infrastructure: Create shared renewable energy facilities, such as solar farms and group captive power plants for SMEs to access renewable energy at reduced costs.

• Technology Transfer Agreements: Facilitate cross-border collaborations to bring advanced, affordable low-carbon technologies to Indian SMEs, emphasising localisation and affordability.

Large Business-Level Efforts

While leading business houses like Tata and Mahindra have set strong examples by establishing policies to support their supply chains, there is a pressing need for more companies to adopt similar practices, including:

• Supply Chain Mapping: Encourage larger companies to map and disclose emissions across their supply chains, identifying high-impact areas and supporting SMEs in reducing emissions.

• Collaborative Capacity Building: Foster partnerships between large businesses and SMEs to co-develop innovative, climate-smart solutions.

• Financial Incentives: Introduce perks like early payments or long-term contracts for SMEs within the supply chain to incentivise climate action.

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Building a concrete business case to drive sustainability in Indian SMEs requires a multifaceted approach blending policy, finance, large business support, government and consumer engagement. Civil society organisations can play the critical role of coordinating these key actors, building capacity and disseminating data. Initiatives need to be launched at the cluster level where associations play a key role in pushing climate action in SMEs across the country. The collective efforts of the SME ecosystem will not only accelerate India’s climate action goals but also unearth new opportunities for growth and resilience for SMEs in a rapidly evolving global economy.

(Dr. Bhaskar Natarajan is Senior Fellow, Alliance for an Energy Efficient Economy, New Delhi, while Swapna Patil is SME Climate Hub India Manager, We Mean Business Coalition. Views expressed by the authors are personal)