Green transition for SMEs - Cogito post

A sound investment: financing the green transition of small and medium-sized enterprises (SMEs)

Action to protect our environment is an investment in our future. As environmental degradation accelerates, research suggests that even a partial collapse of our ecosystem would result in a 2.3% reduction in global GDP by 2030. The impact would be even greater for low-income countries, with real GDP expected to contract 10% annually during the same period. Beyond the economic implications, there are social costs, which drive the true impact much higher. Effectively tackling climate issues requires co-ordination on a global scale. Having effective incentive structures and accountability mechanisms available will help to bring global co-operative efforts to fruition.

Governments around the world have begun taking action

The global community is moving from commitments to action. The Paris Agreement requires each of its 197 parties to the convention to commit to a voluntary reduction of greenhouse gas (GHG) emissions by establishing Nationally Determined Contributions. For example, the United States and European Union have announced their emissions reduction targets through their ‘Long-Term Strategy’ and ‘Fit for 55’ plans, respectively. In the interim, the US is seeking to reduce its emissions by more than 50% and EU by at least 55% by 2030. Similarly, Korea has also established a roadmap to achieve net zero and announced an interim goal to reduce 40% of its emissions by 2030.

Private sector participation is crucial

Achieving net zero requires action across all sectors. In Korea, the industrial sector, including its electricity consumption, accounts for 52% of GHG emissions. Industry’s participation is therefore a crucial factor in achieving net zero. At the same time, the policy environment needs incentivize changes in corporate behavior and integration of ESG principles. To support the transition, the Korean government is providing tax incentives for green technology development and emissions reduction activities, as well as laying the foundations for an emissions trading scheme, environmental information disclosure and a stewardship code. Larger businesses, in an effort to meet the sustainability requirements of the global market, have shifted their perception and are being proactive in voluntarily embracing concepts such as ESG and RE100.

But SMEs must also play their part. Their emissions account for approximately 30% of total industry emissions and 15% of national emissions. Many are now recognising that to maintain their position in the supply chains of larger businesses, reducing emissions to meet ESG requirements has become essential. According to a survey by the Korea Chamber of Commerce and Industry, 57% of SMEs indicated that achieving net zero is a must, but 69% of them have indicated that their actions and efforts remain inadequate. Despite the gravity and urgency of the matter, their progress towards achieving net zero is being held back by various challenges, including upfront costs and technological limitations.

Finance is critical for SMEs’ green transition

To make the transition, SMEs need to be able to finance green investments. Financial institutions and policymakers are looking to fashion tailored instruments that align finance with green values. For example, ‘Sustainability Linked Loans’ promote SMEs’ eco-friendly business activities by requiring them to pledge and implement a greening strategy. Another example is guiding venture capital flows towards investments in green technology and green R&D.

In moving forward with green financing, we need to have common global guiding principles on definitions, classifications, evaluation and implementation.

Jong-won Yoon

The proliferation of multiple taxonomies, carbon pricing mechanisms and evaluation methodologies could cause confusion for market participants, thereby rendering net-zero measures less effective. International co-operation and a harmonised approach is therefore essential.

Guidance needs to be carefully developed so that it properly considers differing stages of economic development. In addition, it needs to be inclusive and fair enough so as not to preclude participation of low-income and developing countries. Non-financial support, such as training and advisory services, will also be useful, complementing financial support for SMEs.

On our collective journey to meet our climate objectives, we must improve co-operation across sectors and across countries. Sharing and identifying best practices in financing SMEs’ green transition will help achieve our ambitions. The OECD’s new Platform on Financing SMEs for Sustainability will be very useful in ensuring that governments and financial institutions fit for purpose to drive the SME green transition.

Read more on the work of the OECD on Financing of SMEs for Sustainability.

Chairman and CEO at Industrial Bank of Korea | + posts

Mr. Jong-won Yoon is the Chairman and CEO of Industrial Bank of Korea and a Co-Chair of the OECD's Platform on Financing SMEs for Sustainability. Mr. Yoon started his career at the Korean government in 1984 and has served at various posts, including as Senior Secretary to the President for Economic Policy, Korean Ambassador to the OECD, and Executive Director at the IMF. Mr. Yoon earned his Ph.D. in Economics from the University of California, Los Angeles. He obtained his Master's degree in Public Administration and Bachelor’s degree in Economics from Seoul National University.