When envisioning a sustainable business, we can imagine those adopting practices such as embracing clean energy, incorporating social impact in a business’s decision-making, or having a diverse board of directors. Conceptually, sustainability encompasses environmental, social, and governance domains, but in this article, we will emphasize the environmental aspect due to the urgency and severity of environmental issues.
For a comprehensive shift towards sustainability across the entire economy, it is crucial to onboard Small and Medium Enterprises (SMEs) and startups, which make up the majority of businesses in most countries. Therefore, supporting these smaller enterprises on their sustainability journey is essential.
Having SMEs and startups join the journey could present significant challenges for these businesses. Integrating sustainability practices may impact profit margins due to additional costs. Tasks like redesigning manufacturing systems for eco-friendliness and engaging external advisors for certification divert resources and attention from core functions. Given these formidable challenges, it is unsurprising that many of them have not prioritized sustainability or, in some cases, have outright rejected participation in the journey toward sustainability.
On the flip side, it is widely believed that sustainability transformation could equip SMEs and startups with the ability for greater value creation. From a financial perspective, they can anticipate top-line growth due to increased opportunities from entering new markets, forming partnerships, setting green price premiums, and so on. In the United States, SMEs and startups that hold strong sustainability propositions will have a higher chance to participate in public-private infrastructure projects than those with a smaller footprint in sustainability adoption. For the case of Long Beach, California, for-profit companies operating with low environmental impacts were selected to participate in the local public-private infrastructure construction projects such as developing the freeways and community areas. Moreover, SMEs and startups can also envision a decrease in operational expenses attributable to mainly reduced waste in manufacturing processes, enhanced energy efficiency, and improved productivity. From a non-financial standpoint, businesses can enhance employee engagement by aligning values and interests on sustainability goals, thereby fostering a more engaged workforce, and has better recognition by the communities around it.
However, there is a possibility that SMEs and startups will be compelled to comply with ESG regulations in the future. Take the new regulation initiated by the EU as an example; the EU has introduced a carbon tariff policy called CBAM (Carbon Border Adjustment Mechanism) to promote decarbonization by imposing taxes on those who export certain products that generate significant amounts of carbon to European countries. SMEs and startups operating in these areas will end up bearing higher costs, ultimately resulting in a loss of competitiveness. Therefore, business owners and management teams should keep this possibility on their radar and proactively consider sustainability transformation to avoid being forced into compliance.
To facilitate SMEs and startups in their journey toward sustainability, a ‘Sustainability Pathway for SMEs and Startups Framework’ will be employed. This framework includes four key steps: 1) establishing awareness, 2) understanding solutions, 3) implementing solutions, and 4) monitoring, to ensure the adoption and progress of the transition for SMEs and startups.
Sustainability Pathway for SMEs and Startups Framework
- Establishing Awareness and Identifying Gaps:
The primary and crucial step for SMEs and startups is to cultivate awareness regarding the necessity and value of sustainability transformation for their business such as understanding what their path to sustainability entails, ability to identify weak points in their businesses, and current limitations in filling the gap. Without a proper education or a comprehensive understanding of the potential benefits, they might experience a lack of motivation and could potentially abandon the transformation process prematurely.
- Understanding Available Solutions:
Once SMEs and startups understand the potential benefits associated with embracing sustainability, the subsequent step involves strategizing the path forward. During this stage, SMEs and startups need to gather data about sustainability solutions such as available technologies in the market, methods for integrating sustainability solutions into their core business, anticipated impacts on their business resulting from the adoption of these solutions, and external source of funds.
- Implementing Solutions:
At the implementation stage, there are three main tasks that SMEs and startups need to get involved in consisting of goal setting and planning, onboarding stakeholders, and executing the plan.
- Goal Setting and Planning:
SMEs and startups must establish clear sustainability goals based on their potential capacities. For instance, those in manufacturing might target short-term carbon reduction and long-term neutrality. To determine the level of sustainability they aspire to achieve, SMEs and startups might need to strike a balance between the costs and benefits they would incur. Given their resource constraints, SMEs and startups should break down the entire processes of their business to identify the critical areas e.g., waste management process that they can integrate sustainable practice while creating the highest possible impacts.
- Onboarding Stakeholders:
Once a clear goal and plan are established, the subsequent step involves securing the buy-in from relevant stakeholders. For example, SMEs and startups may need to persuade their shareholders to adopt sustainability standards, which could entail accepting additional costs during the transformation. Furthermore, SMEs and startups will need to engage in communication with their suppliers and customers to establish a sustainable supply chain that is transparent and has ethical sourcing practices. Lastly, it is crucial to communicate the goals and plans across the organization, ensuring alignment among employees in pursuit of the same direction.
- Executing the Plans:
During the execution process, SMEs and startups will touch on several activities such as acquiring technology and integrating it with their core business, recruiting talents with domain expertise in sustainability, arranging training sessions for employees, and securing sources of funds. Among others, sourcing funds is pivotal and challenging for SMEs and startups. Given their resource limitations, securing the funding to support the transformation should be a primary focus for business owners.
The final step of sustainability transformation involves monitoring. SMEs and startups should start thinking about collecting data in order to generate reports for both internal use and regulatory compliance. Although SMEs and startups in most countries have not been directly required to submit a report to prove their Environmental, Social and Governance (ESG) footprint, some countries have started to demand evidence of carbon emissions and reduction efforts. Take CBAM as an example, SMEs and startups that currently export certain products to the EU will end up paying higher taxes if they cannot comply with the standards or have no solid evidence of their carbon footprint.
Current Stage and Key Challenges of Sustainability Transformation of SMEs and Startups in Thailand
When we apply the sustainability pathway framework to SMEs and startups in Thailand, we have observed that the majority of SMEs and startups in Thailand are concentrated in the first two stages. We have discovered that the primary challenges hindering the progress of Thai SMEs and startups towards sustainability transformation are 1) Insufficient awareness about the significance of embracing sustainability and a lack of know-how and 2) Limited access to sustainable finance products.
- Insufficient awareness about the significance of embracing sustainability and a lack of know-how
During our research, we found that not so many SMEs and startups in Thailand are fully aware of how sustainability can help create value. Some of them also perceive that sustainability is relevant only to large corporations and the adoption of sustainability practices is more in terms of costs rather than benefits. Even though some of them are starting to realize the significance of embracing sustainability, they lack the know-how and are still struggling with where to start and what solutions they should adopt. Furthermore, the majority of transformation activities have been primarily driven by financial institutions (FIs), instead of business owners. Based on our preliminary interview, most deals are initiated by the product development teams of financial institutions to pitch the benefits of being sustainable and offer financial solutions to corporate clients directly.
- Limited access to sustainable finance products
We found that the lack of widely accessible sustainable finance products prevents various SMEs and startups in Thailand from participating in sustainability transformation. Currently, the two main products circulated by financial institutions in the Thai market are 1) sustainable bonds and 2) sustainable loans which provide lower-cost financing for investments that are qualified as ‘sustainable’ per the Thai government’s guidelines including but not limited to climate action, clean water and sanitation, no poverty etc. These products are currently available for certain types of businesses such as solar energy, waste management, reuse and recycle materials, and digital green innovation. The requirements set by FIs for these products are highly stringent, stemming from greenwashing concerns, and often costly to be qualified. For instance, the green project that wants to apply for sustainable loans must be certified by a certain government agency to ensure compliance or have to provide a performance evaluation summary report, prepared by either the company itself or by a third-party advisor. Additionally, companies must maintain their solid financial position, with a Debt-to-Equity ratio lower than 3x. Given these conditions, these products inadvertently become reserved for large corporations that can afford to meet these obligations. As a result, the current sustainable finance products remain out of reach for some SMEs and startups in Thailand.
Roles of Financial Institutions to Accelerate the Sustainability Transformation of SMEs and Startups in Thailand
The journey towards sustainability transformation demands the active participation of every stakeholder, ranging from the public and private sectors to individual consumers. FIs are also considered as one of the most important key players to accelerate the process given their substantial capital and human resources, and extensive outreach channels to SMEs and startups. Considering the challenges that SMEs and startups in Thailand are facing, FIs could help support and accelerate SMEs and startups to the next stage of sustainability transformation and participate in each step of the Sustainability Pathway for SMEs and Startups Framework as follows.
Roles of FIs in Promoting Awareness:
- Creating demand for sustainability among customers will draw the attention of SMEs and startups to start thinking about sustainability transformation. To initially attract individuals, FIs can consider introducing new financial initiatives that generate demand among individuals. For example, FIs can offer carbon credit cards, enabling cardholders to track and measure their carbon footprint for each purchase and offset their carbon emissions by investing in renewable energy projects. Once individuals adopt a sustainability mindset, they can drive more demand for sustainable products and services afterward.
- FIs can leverage their sales representatives to support the sustainable product development process, introduce sustainable finance products and educate about the potential impact of sustainability transformation on their top-line growth and cost reduction to SMEs and startups. This idea is based on the rationale that sales representatives have a deep understanding about existing sustainable finance products and have direct contact to SMEs and startups so they are able to truly recommend suitable products and services to bridge the gap.
Roles of FIs in Helping SMEs and Startups to Understand Solutions:
- FIs can collaborate with government agencies to offer technical assistance services to SMEs and startups. This partnership would enable government agencies to assist SMEs and startups in various activities, such as providing professional advice on energy efficiency improvements, conducting technical workshops on resource efficiency, and performing energy efficiency assessments for facilities. This collaboration leverages the extensive customer base of SMEs that FIs have, allowing government agencies to expand their outreach to a broader range of SMEs and startups.
- FIs can also partner with third-party sustainable solution providers owning services such as clean energy technology, waste management, sustainable consultancy service, etc. to offer such suitable solutions to their SME and startup clients. This represents a win-win situation where FIs can assist their clients in becoming familiar with the range of available solutions by connecting their clients with experts and can introduce their related sustainable finance products to these clients. Simultaneously, these third-party solution providers could expand their business by tapping into FIs’ customer base.
Roles of FIs in Assisting Implementation:
- FIs can expand the range of sustainable finance products available in the market for SMEs and startups so they can partake in this sustainability transformation. For example, FIs can consider introducing more financial products such as social loans and microfinance for women and minority-owned businesses, credit guarantees for green projects operated by SMEs and startups, or green securitizations (a process of transforming illiquid assets such as wind or solar projects owned by SMEs and startups into tradable financial instruments) that allow SMEs and startups access to additional sources of funds apart from traditional ones.
- FIs can consider leverage funding and credit lines extended from international financial institutions as it might be challenging for FIs to lower their bar in providing loans to SMEs and startups due to greenwashing concerns and associated risks given the size of the company at the moment. Promoting sustainability transformations of SMEs and startups is one of the focuses of these international financial institutions but they lack a direct channel to provide loans to these targets in various countries. Therefore, they work through intermediaries, mostly local commercial banks in those countries. For example, FIs can consider partnering with ADB to co-lend on projects developed by SMEs and startups or to provide credit guarantees for green bonds issued by SMEs and startups. This approach will allow local FIs to have increased flexibility in providing sustainable loans as it reduces risk, including longer-term finance risks by sharing them with other lenders, and receiving technical assistance and training so that SMEs and startups can develop more feasible projects.
Roles of FIs in Supporting Monitoring:
- FIs can develop their monitoring solutions or collaborate with third-party providers who possess advanced monitoring and reporting technologies and provide access to SMEs and startups at a reasonable price. Simultaneously, FIs should encourage SMEs and startups to collect their data throughout the sustainability transformation journey by including it as a requirement when such SMEs or startups want to apply for sustainable finance products. From this, SMEs and startups would be well-equipped in terms of reporting for their internal improvement and future regulatory compliance.
Successful sustainability transformations can lead to increased value creation for SMEs and startups. However, addressing challenges like awareness and access to sustainable finance products is crucial. FIs have a vital role to play in supporting these enterprises along their sustainability journey. However, it is essential to expand sustainability goals beyond the environmental aspect to encompass addressing social and governance concerns, as there is substantial room for improvement in these areas. As Thailand moves towards a sustainable economy, collaboration and innovation will be key in ensuring the prosperity of the nation in the long run.
Author: Warittha Chalanonniwat (Paeng)
Special shout-out: Pirada Choophungart (Nina)