In This Article:
- Why the green transition risks creating new inequalities if not managed carefully
- What Just Transition means and why it matters for SMEs
- How SMEs are both victims of climate change and catalysts for just transition
- The financing challenge facing SMEs on their net zero journey
- What policymakers and financial actors must do to ensure no business is left behind
The increased negative impacts of climate change across natural and human systems have been worrisome for stakeholders across the globe. However, what is more disturbing is the need to ensure that the transition towards the low-carbon economy does not give birth to new social and economic issues or escalate the existing ones. While the former is possible to mitigate, avoiding the latter can be practically cumbersome.
Thus, the question of how to ensure a just and inclusive green transition has surfaced in many global dialogues around climate actions.
What is a Just Transition?
Credit: Movement Generation
Just Transition can be conceptualised as mitigating social and economic injustices that may emanate from the net zero transition by ensuring a fair and inclusive distribution of the cost and benefits of the transition.
In contemporary times, Just Transition has been popularised as a concept that delineates the importance of ensuring that everyone – all countries, sectors, communities and groups – are carried along and considered in the transition towards a low-carbon economy.
Even though the discourse of Just Transition is usually centered on the workforce, the concept transcends beyond that and can be examined in the different groups or economic contexts affected by the shift towards a sustainable economy.
However, its popularity in the workforce context might have been influenced by history, as the concept emerged in the 1970s when labour unions adopted the term to advocate for protecting workers affected by environmental regulations.
The SME Perspective
In this article, Just Transition will be examined from an SME perspective.
Small and Medium-Scale Enterprises (SMEs) position as the economic lifeblood of the global and national economies makes them indispensable stakeholders in net zero discussions and sustainable development strategies.
As global stakeholders continue to advocate for a pivot towards a green and sustainable economy, it becomes imperative to ensure the global economy’s engine room (SMEs) is also considered. This is because:
- SMEs are strategically positioned and connected to the global economic structure, and any effective just transition ambition will not materialise without them
- SMEs collectively are major contributors to greenhouse gas emissions and have significant stakes and presence in industries affected by green transitions
- SMEs are more vulnerable to the negative impacts of climate change and often lack the resources needed to protect themselves
Why SME Inclusion Matters
According to World Bank estimates, SMEs represent 90% of all businesses globally and contribute to over 50% of global employment. Similarly, the World Economic Forum (WEF) puts SME share of global employment as high as 70%. Therefore, SME exclusion in just transition discussions would translate to the ostracism of 90% of businesses worldwide and the omission of 50-70% of the global workforce.
| SME Just Transition at a Glance | Figure |
|---|---|
| Share of all businesses globally (World Bank) | 90% |
| Share of global employment (World Bank) | Over 50% |
| Share of global employment (WEF) | Up to 70% |
| Share of business-sector greenhouse gas emissions (OECD) | 40% |
| SMEs reporting lack of finance as barrier to climate action (ICC) | 47% |
| SMEs reporting lack of knowledge as barrier to climate action (ICC) | 33% |
| Projected global economic output decrease by 2050 (WEF) | 11-18% |
| Financial implications of climate physical risks on major businesses | 10% of annual sales and 4% of market value |
| Estimated SME financing need to achieve global net zero (HSBC/BCG) | USD 50 trillion |
SMEs as Climate Change Victims and Transition Catalysts
| SMEs as Climate Change Victims | SMEs as Just Transition Catalysts | |
|---|---|---|
| Overview | SMEs are generally more susceptible to climate risks compared to larger corporations. The lack of resources and technical orientation in many SMEs makes them struggle more when navigating the physical and transition risks of climate change. | SMEs' significant stake in global employment and supply chain suggests they are important partners in promoting just transition. Empowering SMEs for green transition will boost economic growth and ensure an inclusive transition where vulnerable businesses and workers are protected. |
| Key risks/opportunities | Climate-related physical events like flooding and extreme weather can greatly affect assets and business operations. Transitional risks including regulatory requirements, technological shifts and market changes also pose great uncertainty for SME survival. | As economies move away from fossil fuel and carbon-intensive processes, SMEs can create green business opportunities and ensure capacity building for employees to remain relevant, skillful, and resilient after the transition. |
| Who is most affected | SMEs' limited resources make them more vulnerable than large corporations when climate risks translate into financial risks or threaten market share. | Most vulnerable workers and communities are employed within SMEs. According to the ILO, SMEs are more likely to hire from groups vulnerable to unemployment like young, old, and less-skilled workers. |
| Key stat | 47% of SMEs report lack of finance as a barrier to climate action and 33% report lack of knowledge (ICC). | SMEs are responsible for 40% of business-sector greenhouse gas emissions (OECD) - making their decarbonisation essential to achieving global net zero. |
Financing Challenges Facing SMEs
While SMEs are still grappling with access to the finance needed to grow their business, the lack of access to climate finance hints at a more difficult situation for them, and the need to add Just Transition to the equation even presents a very complicated financing challenge for these businesses. According to research published by HSBC and Boston Consulting, SMEs will need USD 50 trillion to achieve the global net zero goal. These financing challenges highlight the dilemma of the role of capital access in helping SMEs deliver their mandates as key stakeholders in the global transition journey.
The Role of Policymakers and Financial Actors in Empowering SMEs’ Just Transition
Institutional governance and sustainable finance are crucial in ensuring SMEs effectively transition to the low-carbon economy and contribute to a just transition. Governments must create policies and frameworks that ensure the engagement of SMEs in just transition plans. Countries’ Nationally Determined Contributions (NDCs) must recognise SMEs as key stakeholders in just transition agendas and dialogues must take place at different governance levels to ensure these businesses are not left behind.
Furthermore, the financial sector also has multiple hats to wear in ensuring the participation of SMEs in just transition. Banks and Non-Banks Financial Institutions (NBFIs) must ensure that SMEs can access sustainable financing products to facilitate equitable and inclusive sustainable economic transition. Apart from the role of the financial sector as fund providers, SMEs can also benefit from the wealth of knowledge of financial institutions in navigating their just transition journey. Additionally, these institutions can help in de-risking SMEs’ sustainability investment, and Development Finance Institutions (DFIs) can play strategic roles in providing technical assistance and increasing SME funding pipelines.
Conclusion: A Shared Responsibility
SMEs’ path towards just transition requires collaboration from multiple stakeholders to achieve the shared value of ensuring a green economy transition that works for all.
This is where Wholesum comes in. Wholesum bridges the gap between impact-driven SMEs and investors who want their money to work toward a better world. Investing through Wholesum is not just a financial decision; it is a practical step toward ensuring that the green transition is truly just – leaving no business, worker, or community behind.
Key Takeaways
- Just Transition is about fairness, not just climate: It refers to ensuring a fair and inclusive distribution of the costs and benefits of the net zero transition – so that no country, sector, community or group is left behind.
- SMEs cannot be excluded from just transition discussions: Representing 90% of businesses and 50-70% of global employment, excluding SMEs from just transition agendas means excluding the majority of the global economy.
- SMEs face a double burden: They are both more vulnerable to the physical and transitional risks of climate change, and more likely to be overlooked in the policies and resources designed to address those risks.
- SMEs are responsible for 40% of business-sector emissions: Achieving global net zero without SME decarbonisation is impracticable according to the OECD – making their inclusion a necessity, not an option.
- The financing gap is enormous: HSBC and Boston Consulting estimate SMEs will need USD 50 trillion to achieve the global net zero goal – a figure that underscores the urgency of mobilising sustainable finance at scale.
- Policymakers and financial actors must act: NDCs must recognise SMEs as key stakeholders, banks and NBFIs must expand access to sustainable finance products, and DFIs must provide technical assistance and increase SME funding pipelines.
- Just transition is a shared responsibility: No single actor can close the gap alone – governments, financial institutions, multilateral bodies, and impact investors must collaborate to ensure the green transition works for all.
References
- The Wire Science. Hyderabad Urban Flooding, Climate Change and Anomalous Rainfall. https://science.thewire.in/society/urban/hyderabad-urban-flooding-climate-change-anomalous-rainfall-urban-infrastructure/
- Movement Generation. Just Transition. https://movementgeneration.org/justtransition
- McKinley Plowman. Small Business Update: Market Snapshot.https://www.mckinleyplowman.com.au/community/news/small-business-update-market-snapshot
- World Bank. SME Finance and Job Creation. https://blogs.worldbank.org/en/psd/quest-better-understand-relationship-between-sme-finance-and-job-creation-insights-new-report
- World Economic Forum. Accelerating Business Action on Climate Adaptation. https://www.weforum.org/reports/accelerating-business-action-on-climate-adaptation
- International Chamber of Commerce (ICC). SMEs and Climate Action. https://iccwbo.org/news-publications/policies-reports/sme-climate-action
- Organisation for Economic Co-operation and Development (OECD). SMEs and Green Growth. https://www.oecd.org/greengrowth/GGSD_2018_SME%20Issue%20Paper_WEB.pdf
- International Labour Organization (ILO). SMEs and Employment. https://www.ilo.org/employment/areas/msme/lang–en/index.htm
- HSBC and Boston Consulting Group. SMEs and Net Zero. https://www.hsbc.com/news-and-views/views/hsbc-views/smes-and-net-zero
- Xero. How to Be Environmentally Sustainable. https://www.xero.com/au/guides/how-to-be-environmentally-sustainable
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