Small firms, big impacts: Green transition must embrace SMEs

Aug 22, 2022

Opinion by Hasintya Saraswati, Policy Specialist (Energy and Sustainability), and Indira Z. Aridati, Policy Manager Global Future. First published in Jakarta Post.

Climate change is an existential threat. While numerous initiatives and policies have emerged in response, “climate action failure” is still recognized as the number one global risk over the coming decade, according to the World Economic Forum’s The Global Risks Report 2022. To avoid irreversible damage to our people and planet, we must step up the green transition.

As the holder of this year’s Group of 20 presidency, Indonesia has a unique opportunity to promote economic pathways that address both growth and climate. In these areas, Denmark has been an important partner for Indonesia. However, the partnership could still be strengthened by placing small and medium enterprises (SMEs) at the heart of it. SMEs form the majority of the world’s firms and their greening process is a crucial part of the solution to the world’s green puzzle. SMEs are one of the most important pillars of the Indonesian economy. Based on data from the Cooperatives and SMEs Ministry, the country had 64.2 million SMEs as of March 2021 that contributed 61.07 percent to the gross domestic product, or an estimated value of Rp 8.57 quadrillion (US$576.12 billion). They absorbed 97 percent of the total workforce and received 60.4 percent of total investments.

Unfortunately, SMEs are often overlooked in the green transition, despite the immense role they play in fostering innovation and building economic resilience: two things needed in the green transition. The green transition has made its way into government policy. For example, in May 2021, President Joko Widodo announced that the country would not build any new coal-fired power plants after 2023. Meanwhile, the Investment Ministry is promoting the acceleration of deploying renewable energy 23 percent by 2025 and 31 percent by 2050, and the energy ministry has set a goal to reach net zero emissions by 2060, or sooner with international support. These commitments are strengthened by regulations on carbon pricing and the country’s support for the Global Coal to Clean Power Transition Statement at last year’s United Nations climate conference (COP26).

The energy transition is also the three priorities of Indonesia’s G20 presidency, which aims to reach a global deal on accelerating the energy transition by the end of its tenure. Indonesia needs to invest between $150 billion and $200 billion annually in low carbon programs over the next decade to fulfill its climate ambitions. While progress has been made, the country’s green transition will undoubtedly move faster with the support of more partners.

Denmark has been one important partner for Indonesia in this, with the two countries’ bilateral cooperation on climate and energy going as far back as 2015 through the Strategic Sector Cooperation, according to the Danish Energy Agency. This has now expanded under the 2020-2025 Indonesia-Denmark Energy Partnership Programme (INDODEPP), worth 60 million krona ($21.56 million), which has an overall objective to contribute to decarbonization and low carbon development.

Two years into its implementation, a number of studies have been done to highlight the actual gap between the national targets and provincial plans for the green energy transition. To enhance INDODEPP’s outcomes, the Jan. 27 meeting in Denmark’s Council for Development Policy recommended enhanced engagement under the INDODEPP 2022-2025. Pending the approval of the Danish minister for development cooperation, this would enhance the outcomes of INDODEPP while at the same time supporting local development and increasing resilience to climate change. One important lesson Indonesia can take from Denmark’s energy transition is how public-private partnerships (PPPs) have been a catalyst.

The relationship is complementary, with the public sector providing ambitious long-term goals and stable framework conditions, while the private sector supplies the innovation, solutions and investments needed to achieve the vision. Businesses of all sizes are important in the green transition, and a key element of Denmark’s green transition success is private sector support. Support from businesses and industries has allowed for the implementation of new regulations and programs, all of which have resulted in reducing the carbon footprint and more efficient resource use, such as 50 percent of electricity supplied by wind and solar power, according to the Danish foreign ministry, as well as an increased level of sustainability in the country’s value chain.

The Danish government’s Climate Partnerships 2030 reported it currently had 14 climate partnerships across a range of sectors to support its 70 percent reduction target. SMEs are particularly important, as they constitute the majority of businesses around the world. This also applies to both Indonesia and Denmark, with SMEs making up around 99 percent of firms and consuming around half of the energy used by businesses in the latter country, according to SMVdanmark. While their individual environmental footprint is small, they contribute to a high amount of industrial pollution on aggregate, reflecting the large potential SMEs have for green growth.

Vis-à-vis the energy transition during Indonesia’s G20 presidency, one of the highlighted topics is advancing accessibility, to ensure that the principle of “leaving no one behind” is implemented to provide affordable, reliable, sustainable and modern energy for all. Indonesia is committed to rapidly scaling up the widest variety of technologies and taking a people-centered approach. This is where Indonesian SMEs can play a far-reaching role. SMEs can contribute to Indonesia’s green growth through eco-innovation, eco-adoption or eco-entrepreneurship. With consumers now more aware of their carbon footprint, some SMEs have also shifted their business models toward more sustainable practices. Their approaches vary from providing services that protect the climate and environment to innovating new technologies and products.

Danish SMEs have incrementally included circularity as a core part of their businesses as part of the Green Circular Conversion (GCO) project. A study of over 600 Danish companies has revealed that environmental standards help with the green transition and the introduction of new technologies. According to the European Commission, the Clean Green Plan involving 200 SMEs across Denmark’s Zealand region has also shown that SMEs can save energy and resources by exploring greener ways of doing business.

While SMEs undoubtedly play an important role in the green transition of any country, they are still often overlooked in energy policies. This means they are unable to fully contribute their potential to energy-saving opportunities or carbon emission reductions. To accelerate Indonesia’s green transition, it is necessary to engage SMEs on energy and on climate change in general to ensure the greening of 50 percent of SMEs by 2030 in line with the targets outlined by the Industry Ministry. Although switching to green business practices can enhance competitiveness, SMEs are often reluctant to pursue this route. This reluctance is due to technological and production challenges specific to SMEs, such as access to financing, regulatory barriers and informational deficits in the greening process.

Ensuring growth is green and that SMEs are part of that growth will help make economies more competitive, both nationally and internationally. Danish companies that have undergone the green transition can partake in knowledge and technological transfers to help Indonesian SMEs become more resource efficient and reduce waste in their business cycle. Practical help is needed during the green transition for both SMEs’ business models and physical premises. Indonesia has an opportunity to play a big role in the global race toward net zero emissions.

At the same time, it is crucial for the government to ensure sustainable economic development. Public, private and community partnerships backed by international support could help the country’s green transition and enable the achievement of its renewable energy and decarbonization targets.

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