Abstract

From being a boardroom agenda, sustainability is now being actively implemented on the ground.

This move has been driven by a change in the buying behavior of Gen Z customers and their demand for transparency in the sustainability efforts of businesses. The micro, small, and medium enterprise (MSME) sector is the driving force behind an economy’s growth. In addition, MSMEs serve as ancillary units to large industries and play a crucial role in the supply chain. Given their ability to generate jobs, governments are launching special initiatives to boost the MSME sector, with banks and financial institutions mandated to offer low-cost funding to accelerate these initiatives. In our view, this creates a tremendous opportunity for banks to help the world transition to a greener economy and further their own sustainability agenda by incentivizing MSMEs to design sustainable products. We highlight how banks can build a digital ecosystem with MSMEs, regulators, and customers to drive the creation of sustainable products, broaden their influence beyond financial services, and leave a greener impact on the planet.

Introduction

For most organizations, sustainability is no longer just a topic for the annual report but a crucial element of day-to-day operations.

Organizations across industries are now taking practical action on the ground to minimize their environmental impact and promote long-term sustainability. This shift has been mainly driven by a change in consumer attitudes. Public sentiment has shifted toward building sustainable processes, demanding transparency and accountability, and promoting social responsibility. Consumers are seeking sustainable products and are also open to paying more to support their values. In a consumer retail survey conducted by TCS, 90% of Gen Z and millennial respondents said that their purchase decisions were influenced by whether an item was sustainably-made and responsibly-sourced. In addition, 69% of all consumers said they had paid more for sustainably-produced and responsibly-sourced products. 

Clearly, sustainability has become a business imperative driven by market and regulatory forces as well as rising consumer demand for tangible on-the-ground action. For MSMEs, this translates into an opportunity to differentiate themselves in the market and grow their customer base by manufacturing sustainably-produced products. However, access to finance, especially formal credit, is still a key constraint to their growth. In response, governments have taken several policy decisions and launched initiatives to ease their problems and enable growth. Banks and financial institutions will be key to the success of such government initiatives, given that they will be the conduit for the flow of credit to MSMEs.

And here lies the opportunity—we believe banks and financial institutions must introduce specific green financing schemes for MSMEs. They must incentivize MSMEs to embrace the concept of ‘sustainable-by-design’ and incorporate sustainability into their product and service design, processes, and connected ecosystems and value chain operations. This will help banks align themselves with consumers’ green beliefs and values and meet their demands for sustainable processes and ethically-sourced products. Moreover, it will help banks create green revenue streams and help them further their own sustainability agenda in line with net zero commitments. 

Green digital ecosystems

In our view, banks must orchestrate a digital ecosystem with MSMEs, regulators, and customers as key players.

This will be a win-win scenario for all stakeholders. In such an ecosystem, consumers can easily buy sustainable products and MSMEs will have access to green financing and an exclusive platform for their offerings. Further, banks will benefit from a new revenue stream, while regulators will gain a transparent view of risk controls and compliance initiatives of banks as wells as MSMEs. The ecosystem must include banks, MSMEs, customers, and regulators, where each player has a specific role to play.

Banks

As orchestrators of the ecosystem, banks must own the platform and play the role of financier, which can take the form of subsidies and low-interest green loans to MSMEs. Banks and financial institutions can also don the hat of a coach and offer advisory services to MSMEs on how to become more sustainable. This can include helping businesses to understand sustainability risks and opportunities, identify areas for improvement, and develop sustainability strategies. In addition, banks can enable MSMEs in the ecosystem to create a catalogue with the sustainability ratings of their products to help consumers choose the most non-toxic and green products. Such initiatives can help banks accelerate their sustainable lending initiatives and move closer to achieving their own sustainability goals. Furthermore, they also act as an additional channel to offer financial products and services, identify cross-sell and upsell opportunities, and uncover new ways of value creation and revenue generation.

MSMEs

Considering MSMEs account for a majority of businesses worldwide, they have immense power and can influence larger companies and consumers to embrace sustainability. They can form partnerships and networks with other sustainability-focused companies and create a niche market for themselves, which will encourage larger companies to follow suit. Furthermore, relentless focus on offering green products and services that are eco-friendly, sustainably-produced, and responsibly-sourced will help establish MSMEs’ sustainability credentials. This will set them apart from larger, less nimble competitors, and help them gain customer mindshare and loyalty. The ecosystem also presents MSMEs an opportunity to leverage their sustainability credentials and build credit history, easing their path to accessing formal credit. 

Customers

The ecosystem will enable customers to identify sustainably produced products and services based on ESG scores. By supporting these businesses, customers can contribute to the local economy and spread awareness about sustainable products and services and encourage others to support them. This can take the form of sharing information about sustainable offerings available in the ecosystem on social media and recommending sustainable businesses to friends and family. This, in turn, will result in satisfied customers becoming strong advocates of banks for their sustainability initiatives.

ESG regulators

ESG regulators are critical to this digital ecosystem as they are responsible for enforcing sustainable practices. They will assess the processes of MSMEs and assign ESG scores to their products. By establishing a framework for assessing and reporting ESG performance, ESG regulators can monitor the compliance of MSMEs and banks with ESG standards and guidelines, holding them accountable for sustainability practices and arresting greenwashing.

Collaboration and support of ecosystem partners will play a critical role in providing a seamless customer experience. Additionally, such an ecosystem model can enable banks to unlock new opportunities and capitalize on untapped revenue streams. 

Building the ecosystem

Clearly, a dedicated ecosystem for products sustainably produced by MSMEs will give a massive boost to the sector in addition to being win-win for all partners.

The ecosystem (see Figure 1) must be built on a blockchain network, which will ensure immutability and transparent data sharing. It will also enable banks to store, track, and trace various aspects including business model verification, KYC and supply chain information, and transaction data. MSMEs can partner with others ecosystem players for mutual growth, creating additional revenue opportunities for banks and building trust within the ecosystem.

Figure 1: Key components of a sustainable products ecosystem

To create an efficient digital ecosystem centered on sustainability, banks will need to take certain important steps:

• Develop a network of MSMEs focused on sustainability.
• Establish a process for MSMEs to register and become a part of the ecosystem. Details such as source and type of raw materials used, the carbon footprint of the manufacturing process and so on must be collected.
• Lay down a process for MSMEs to disseminate information about their sustainability practices as well as the ESG scores assigned to their products by regulators. This will help customers make informed choices based on their personal values and beliefs.
• Offer financial assistance to MSMEs based on the ESG scores of their products.
• Create a system to award sustainability badges and credits to MSMEs. Such credits, coupled with sales data, can form the basis for banks to grant further financial assistance to MSMEs.
• Enable consumers to access the ecosystem and choose products based on ESG criteria.
• Develop facilities to enable consumers to dispose of e-waste and earn badges that can be redeemed against purchases.