In response to the need for sustainable growth, the government has officially set 2070 as the target year for achieving net-zero carbon emissions, which must be balanced with the country’s demographic transition while achieving self-sufficiency in domestic production. This optimisation function finds the Micro, Small, and Medium Enterprise (MSME) sector as a vital component, contributing 30 per cent to the total GDP, 35 per cent to manufacturing output, and 45 per cent to overall exports, while employing 20.39 crore in the last four years.
This, however, comes with various measurable and non-measurable costs since MSMEs rely on traditional labour-intensive methods, resulting in higher resource consumption, which is affecting their profitability and competitiveness. Naturally, this constrains the adoption of energy conservation policies. This challenge is not unique to India. The SME Climate Survey 2024 has reported that 52 per cent of MSMEs worldwide have identified limited access to finance as the primary factor preventing them from taking climate action.
India has over 6,000 MSME clusters. Per the Bureau of Energy Efficiency (BEE) estimates, there are about 180 energy-intensive MSME clusters, consuming approximately 40 per cent of the overall energy consumption by industrial MSMEs in 400 clusters. The MSMEs in the steel re-rolling sector have an average specific energy consumption (SEC) that is 30 per cent higher than that of large-scale industries in the country; in glass and refractory industries, the SEC ranges from 3.8 GJ (gigajoule) per tonne to 7 GJ per tonne, whereas the international standard stands much lower at 3.27 GJ per tonne. In the paper industry, the SEC for Indian MSMEs is marginally higher at 0.251 TOE (tonne of oil equivalent) per tonne against international standards at 0.22 TOE per tonne. The emissions by MSMEs in the brick industry are 66-84 million tonnes of CO2, which is roughly 2.5 per cent of total emissions in India.
Unsustainable emissions may present a major challenge to the long-term viability of the MSME sector. Given their significant contribution to exports, their operations are increasingly subject to scrutiny under global carbon standards, such as the European Union’s Carbon Border Adjustment Mechanism (CBAM). As a result, compliance with sustainable production processes is becoming even more critical for ensuring continued access to international markets.
Globally, industries are increasingly being brought under the scope of energy efficiency and sustainable finance requirements through taxonomies, regulations, and capital markets. These instruments rely on robust disclosure data and a well-established climate information infrastructure. Whereas in India, according to the Council on Energy, Environment and Water (CEEW), in 2019, only a small number of MSMEs conducted energy audits and reported their emissions. The absence of market-linked emission policies for MSMEs removes any incentive or obligation to adopt sustainable practices or disclose emissions data. In contrast to SEBI’s BRSR framework, which mandates the top 1,000 listed companies to report both direct and indirect emissions, MSMEs face no formal disclosure requirements. This challenge is worsened as 99 per cent of MSMEs are classified as ‘micro’ enterprises; these are largely informal and lack the technical capacity to measure or report their emissions.
With financial institutions increasingly insisting on adopting ESG norms and green lending practices, the absence of emissions disclosure by MSMEs can further hinder their access to capital, including traditional bank loans, ultimately impeding investments in better technologies and sustainable practices.
Under the existing framework, reporting can be advanced through two key channels. First, the BRSR framework can serve as an entry point by encouraging large corporations to disclose the emission intensity of their supply chains. Since the framework already requires reporting on procurement from MSMEs under Principle 8, this provision can be expanded to include voluntary disclosures on the environmental impact of sourced inputs. And second, this can be achieved through the government’s Public Procurement Policy 2012 (amended in 2022), which mandates 25 per cent of government procurement from MSMEs, a figure that has increased to up to 40 per cent in recent years. Linking the procurement process to GHG emission disclosure can incentivise sustainable practices by the MSMEs. In both cases, the burden of compliance can be mitigated through targeted support from either the government or corporations, such as the provision of smart meters and CO2 monitors, enabling MSMEs to directly measure their Scope 1 emissions.
Since limited access to capital is a key barrier preventing MSMEs from advancing climate action, policies linking green initiatives with capital access and disclosure can be more effective. It is important to emphasise that the goal is to incentivise access to finance by encouraging sustainable practices rather than penalising non-compliance. For example, designing credit guarantee schemes linked to green initiatives or lower emissions can encourage MSMEs to strive towards lower emissions, reporting, and also access to capital. This will create a data repository for the banks to verify any possibility of greenwashing.
Also, there is a need to leverage AI and create Digital Public Infrastructure, where dedicated simplified portals need to be developed, which can use the annual reports and financials of MSMEs to approximate emissions and the related cost of reduction — example, BIS led Project Viridis, where climate data is extracted from corporate disclosure documents using natural language processing techniques. Advancements and innovations in measurement, compliance, and maintenance databases are increasingly important, especially as governments move towards implementing carbon trading strategies.
The draft Climate Finance Taxonomy for India, currently open for public consultation, includes provisions for the MSME sector based on a proportionality approach. However, before applying thresholds and standards to assess their alignment with the taxonomy, it is essential to establish a robust GHG emissions database for MSMEs, something that the proposed approaches could help enable.
Banka is an IES officer in the Ministry of Finance, Gopakumar and Akanksha are Assistant Professors at School of Liberal Arts, IIT Jodhpur. Views are personal
