What Makes Green SMEs Start Up? A Brief on Enablers, Barriers and Recommendations for Action
Why focus on green SMEs? Because green small and medium-size enterprises (SMEs) represent a key win-win strategy for the economy and the environmental transformation. Taken together, SMEs have a greater impact on the economy and the environment than large companies.
SMEs play a key role in economies around the world and are the most common form of enterprise. In OECD member states, SMEs account for approximately 99% of all firms (of which over 90% are micro-enterprises) and represent about 70% of total employment, generating between 50% and 60% of value added on average. In emerging economies, SMEs account for up to 45% of jobs and 33% of GDP. If the contribution of informal businesses is also included, SMEs provide over 50% of employment and GDP in most countries, regardless of income levels. In the European Union, SMEs account for 58.6% of value added.
Green business models are defined as “business models which support the development of products and services (systems) with environmental benefits, reduce resource use or waste and which are economically viable. These business models have a lower environmental impact than traditional business models”, according to FORA, the Danish Enterprise and Construction Authority’s division for research and analysis. Green SMEs that are focused on financial profit and dedicated to environmental sustainability can lead the green transformation from the ground up by creating new business models and providing examples of successful sustainable business practices that can be adopted by more and more companies.
New small businesses are often the first to implement innovations that have a significant impact on economic growth, as they have greater flexibility to explore new technological and commercial opportunities than more established businesses do. SMEs account for 17% of all technology patents in the European Union. Small businesses frequently adopt innovations and apply them to different contexts and locations that are not large enough in scale to attract big companies. SMEs are also receptive towards green innovations and often act as initiators in the eco-industry and clean-tech markets; in the UK, for instance, they account for over 90% of clean technology businesses, and 70% in Finland.
In creating businesses, entrepreneurs are dependent on a range of external conditions. Most act as two sides of the same coin. Consider the following examples selected from many others noted in the recent Policy Brief issued by The Ground_Up Centre for the GREEN-WIN project:
- Dependence on demand for new greener goods and the opportunity to cut costs through resource efficiency are significant drivers for SMEs. This is connected to customers’ increasing environmental awareness. However, experts note that sustainability is an added value. The product and the price are important, responsibility comes after. Finding their place on the market or being able to create a market niche is the most critical challenge for green SMEs.
- Government regulation can be a key enabler through green standards and certification, clear, coherent and accessible regulation. At the same time, it can also be a strong barrier to starting up green SMEs when it is fragmented, incoherent across sectors or parts of policy-making and when at the local level compliance is complex, confusing and costly.
- Access to finance is key as is the availability of various forms of capital that match the size and maturity stages of green SMEs. On the other hand green SMEs have a high-risk profile, low liquidity and uncertain profitability. Access to financing can be difficult due to the relative immaturity of the eco-innovation market, problems in accurately pricing the risk of investments or a mismatch with the typical investment criteria used by venture capital and equity investors. In addition, many company founders seeking investment lack financial literacy. Understanding terms used by financiers, understanding the financing process, knowing how to approach financing and how to prepare for fundraising are common challenges everywhere in the world.
Policymakers, both at the international and the national and local levels, have a key role to play in enabling the transition of SMEs to the green economy, mainly by adopting clear and coherent regulation, creating enabling market conditions for green products and services and facilitating access to funding and capacity building programmes that support investor-grade green SMEs.
Collaboration among entrepreneurs creates the basis for green industry strength. Governments and local regulators can collaborate with business and trade associations in order to clarify regulations and stimulate the adoption of green practices, as well as to learn more about the needs of SMEs from these collaborative structures.
Finally, there is a major contribution all players can make: governments, entrepreneurs and investors. This is about building capacity for investment readiness. It includes support for the development of business skills, management, sustainability measurement and reporting and enhancing financial literacy. Without these skills, there will continue to be too few investor-grade opportunities, limiting access to finance and stifling the start-up of green SMEs.