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Fighting Climate Change Through SMEs

According to the World Bank, small and medium enterprises (SMEs) comprise 90% of businesses around the world, employ 50% of the global workforce, and in emerging economies, formal SMEs make up 40% of those countries’ GDPs, and when factoring in informal SMEs, that number is much greater. Despite their integral role in the global economy, and at a time when the world faces an unbelievably bleak future due to the state of the earth’s climate, SMEs are often overlooked as part of the solution to climate change, despite having an enormous impact on their communities and local economies. Attention is primarily given to investing in climate mitigation (renewable energy) and resilient infrastructure for adaptation. What we are overlooking is that SMEs can create local solutions that drive adaptation and build resilience to climate change, becoming agents of climate resilience themselves, if given the right tools and investment, which they currently do not have.

Investors’ desire to create sustainable, measurable impact, particularly regarding climate change, is booming. But climate change financial products and metrics — which would connect these investors to SMEs — have been developed for large corporations and are too complicated or expensive to be used by SMEs, leaving investors to drive climate impact through applying an ESG checklist that avoids negative externalities and/or focusing on making investments in the climate mitigation sector.

Africans working field

Courtesy of SOWIT

While these measures may have been sufficient in the past, they are not adequate to meet global climate challenges. But SMEs can fill this gap. With more than 32 years of experience supporting SMEs, SEAF has seen firsthand that they can create climate adaptation solutions for their communities, whether helping farmers in Morocco forecast drought-prone areas using drones and artificial intelligence (AI), or replanting the Colombian jungle with regionally native jagua trees that produce income for local communities. We have also seen SMEs become agents of climate adaptation by investing in renewable energy for their cold storage warehouses or by recycling their waste. However, what we have not seen is more investment flowing to these SMEs to help them scale up these solutions.

Grassy Hillside

Courtesy of SEAF Ecoflora

What is missing is investment to help SMEs bring their solutions to new markets, along with tools to help them make their own operations more resilient to future climate risks. Utilizing SEAF’s previous experience developing and launching the Gender Equality Scorecard © (GES©), (see Table 1) — which turns every SEAF investee into an agent of change for women’s empowerment in their communities — we are now planning to develop a climate resilience scorecard built specifically for SME challenges and implementation capabilities. Informed by the voices of our SME investees across 40 markets, SEAF’s GES© is a proprietary screening tool that assesses women’s economic empowerment and gender equality within investment opportunities and portfolio companies based on 6 gender equality performance vectors.

SEAF GES Diagram

Table 1

The findings are then utilized to introduce best practices to enhance gender equality programs in our investee companies by embedding these programs in policies, processes, and procedures, and monitoring the implementation through periodic assessments. SEAF’s team actively works with our SME portfolio companies over the life of the investment to make these strategic and operational improvements that will raise the score of the company, continuing these efforts all the way through to the fund’s exit.

Deforested Land

The above image depicts a deforested area that portfolio company Ecoflora is seeking to plant with Jagua trees, partially substituting extensive cattle breeding and preserving the remaining rainforest shown on top of the hill. Courtesy of SEAF Ecoflora

Our climate framework needs to address companies across industries and must be simple to use and comprehensive to generate the most accurate snapshot of areas in which a company can make gains in environmental impact. By testing and improving it, SEAF will develop a standardized climate metrics tool for SMEs that will work similarly to our GES© tool discussed above, as we would embed these climate resilience programs into our SMEs’ policies, processes, and procedures, monitoring the implementation through periodic assessments. The climate scorecard would assess companies based on specific, decided upon, and standardized vectors, such as waste management, use of resources, and emissions; it would also not be a pass/fail assessment requiring companies to obtain a high score in each area, but rather a tool to identify where a company can improve its impact and the most relevant way to do so according to each company’s specific activities, resources, and SEAF’s contributions. Applying the scorecard would be the first step in determining each company’s singular climate focus and selecting the appropriate indicators to monitor it going forward.

SEAF believes optimizing climate metrics does not need to be in conflict with a company’s financial performance. On the contrary, we believe that integrating climate solutions into post- investment technical assistance has the potential to drive financial performance. Building out this framework, training our investment officers globally, and developing case studies highlighting our successes and learnings is paramount in making this tool something that others in the industry can leverage when developing climate resiliency plans for their SMEs to build climate adaptation portfolios, regardless of sector or region, driving performance and optimizing value for the community in which the SME operates. The influence SMEs have across economies imbues them — given the right tools and resources — with the potential to become one of the world’s most powerful climate change solutions.

Agnes Dasewicz is the CEO of Small Enterprise Assistance Funds (SEAF), a leader in impact investing in emerging and frontier markets for over 30 years, investing in local entrepreneurs with a focus on climate change, food security, and inclusion. Agnes has more than 25 years of experience in private equity ... Read more

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