Four Ways to Support Green Production in SMEs

This blog was authored by Rhea Dhar and Rachel Levine while interning at Chemonics International.

Growing global populations and economies are underlying forces that continue to place a strain on our planet’s natural resources and ecosystems. Organizations across sectors and sizes are recognizing climate change as a disruptive force that has caused direct impacts to industry, such as supply chain breakages and shortages, as well as indirect impacts, such as legal liabilities for pollutants and a shift in consumer preferences. In addition to government-led climate commitments, consumers are becoming more climate-conscious and changing their behavior to favor products that are “green,” minimizing environmental impacts. Small and medium enterprises (SMEs) are key players in transitioning to a greener economy, contributing 60% of global industrial carbon emissions and 70% of global pollution. However, some innovative practices or technologies intended to support net-zero goals have raised concerns among businesses that those innovations in green production come at a cost to their time or finances. Governments, business support organizations, international organizations, and development firms must all work together to ensure smooth green transitions for SMEs.

Supporting Green Production in International Development

Researchers at the University of Cambridge conducted a literature review of the various definitions and concluded that “green production is the application of environmentally and socially sensitive practices to reduce the negative impact of manufacturing activities while, at the same time, harmonizing the pursuit of economic benefits”. ITC’s Empowering the Green Recovery 2021 Report identifies four motivators for businesses, specifically SMEs, to adopt green production:

1. Increased resilience – Transitioning to green production practices improves firms’ competitive ability, deepens connections with clients, and enhances resilience to the impacts of global warming.
2. Cost reductions and higher productivity – Eco-efficient technologies enable SMEs to produce more from the same inputs while reducing waste.
3. Compliance with climate and environmental regulations – Proactively reducing carbon footprints will ensure that firms meet existing and expected trade regulations.
4. Access to markets and eligibility for green financing – going green and earning certifications make businesses more attractive to newer, more climate-conscious markets and investors who are diversifying their portfolios. 

Chemonics International works with USAID around the globe to support green production by using a market systems approach that includes engaging with governments, providing financial support to offset initial costs, helping businesses to obtain certifications for sustainable practices, and transforming behavior by creating awareness to advance the greening of production further. Below are four key lessons for supporting SMEs in their green transition.

1. Engage with Governments to Change Policy and Fast-Track Green Production 

Chemonics supports governments during their green transitions by researching potential methods for achieving green production and providing technical assistance to implement and scale up solutions. This support is crucial because partnering with governments to develop a greater understanding of the benefits and opportunities of green production may lead to it becoming a policy priority, thus fast-tracking new developments. For example, the USAID South Africa Low Emissions Development Program partnered with the Saldanha Bay Metropolitan Municipality on a study concerning its construction and demolition waste management. The study was for waste characterization, with the goal to mitigate emissions by reusing and recycling construction waste through separating waste on-site and also to result in the creation of new jobs and revenue streams. In Colombia, the USAID Natural Wealth Program collaborated with Guaviare’s Governor’s Office and other international and local organizations to further their commitment to greening cattle and dairy production. This initiative is significant because cattle emit more than 7% of all natural gases across the world and require significant acreage and resources to raise. As part of the collaboration, the Natural Wealth Program supported the creation of Guaviare’s Sustainable Cattle Production Roundtable, a regional working group to regularly promote conservation practices to reduce deforestation and prioritize projects such as the construction of a new refrigerated meat processing plant to reduce waste due to spoilage.

2. Provide Financial and Technical Support to SMEs to Offset Higher Costs and Reduce Waste

Although there is a growing consensus that economies need to go green to save our planet, adopting more efficient, low-waste processes can require upfront costs and investments that many SMEs cannot afford. Donors and philanthropists need to help offset these initial costs by mobilizing finance and technical assistance to support SMEs in their green transitions and to support new, climate-friendly businesses and startups. For example, the USAID Zrda Activity in Georgia partnered with the JSC Partnership Fund’s Start-up Georgia to implement a program to promote innovative business ideas and local economic development, create jobs for residents to curb the flow of out-migration, and contribute to community resilience. Startups such as Hazel and Gug are examples of businesses that received financial support through this program. Hazel produces coal from recycled hazelnut and walnut shells, which generates energy from nutshell waste and lengthens combustion time by 150%, resulting in lower emissions and pollution. Gug converts used motor oil into low-viscosity marine fuel, a diesel fuel substitute for motorboats, ships, and locomotives, thereby reducing the use of raw materials and extending the lifecycle of motor oil by transforming it into a different fuel form. 

3. Help with Certification Processes to Meet Sustainability Standards

As more countries adopt climate-friendly policies, SMEs within or exporting to, those markets need to meet more comprehensive climate-related requirements and standards. Depending on a country's requirements, earning certifications for sustainable production practices could support this process. For example, the USAID Moldova High Value Agriculture Activity supported 100 companies to obtain 146 certificates in Global Good Agricultural Practice (GLOBALG.A.P.) and ISO 22000. Qualifying for this certification requires that applicants meet certain plastic and food waste management standards and energy efficiency requirements. Another USAID program, Pakistan FIRMS, assisted stone processors in adopting management and conservation practices to reduce waste and lower production costs. FIRMS introduced the ISO 9000 certification to eight partners as well as trained them on lean manufacturing principles, leading to all eight successfully achieving certification that signaled to clients that the firms were committed to waste reduction and sustainability. Since FIRMS ended, other USAID-funded programs in Pakistan have continued to support certification achievement for firms across sectors, including ISO 14001 and ISO 45001.

4. Transform Behavior through Evidence

USAID programs have facilitated information-sharing between organizations to transform behaviors through evidence highlighting the need for and benefits of green production. The Lebanon Community Support Program collaborated with civil society organization Saida Btaaref Tefroz (Saida Knows How to Sort) to produce an awareness video encouraging residents to recycle, while the Moldova Competitiveness Project supported Moldova in Fashion Conference focused on “Recovery Measures for Sustainable Fashion.” The conference addressed global fashion trends related to sustainability, circular economy, digitalization and innovation, and 3D printing for sustainable design and prototyping. Additionally, an association supported by the project in Moldova was able to partner with the United Nations Development Programme to facilitate access to more opportunities for members while embracing a circular business model through the launch of a new platform for firms to exchange information about leftover stock from manufacturing supply chains. The platform aimed to increase efficiency and quality, reducing resources used in production and extending product lifecycles.

The Future of Green Production

While the financial and environmental benefits of going green are apparent, it is important to acknowledge that the transition can be difficult, especially for SMEs. Governments, development organizations, and SMEs must incorporate lessons learned from the previous programming to work together in facilitating transitions to a greener economy.

ITC’s Green Recovery Plan recommends that governments and development organizations consider the following as they support green production in their respective countries and sectors:

• Governments must provide incentives for green production, embed sustainability in recovery plans, and ‘think small first’ in policy development by analyzing how proposed regulations impact smaller firms and by adopting longer transition periods to satisfy new regulations and help mitigate losses.
• International organizations should continue facilitating intergovernmental collaboration on climate change action and provide platforms for best practices and information.
• Development organizations and funders should increase access to green transition funds and impact investments for SMEs, provide technical assistance, and connect climate investors and -entrepreneurs to SMEs.

Designing green regulations is key to sustainable growth and correcting existing market failures, such as subsidized and underpriced environmentally harmful products. Regulations can encompass carbon pricing, gradual removal of subsidies on environmentally harmful products, and green taxes.

For SMEs, there are several key actions for implementing green production:

• Avoid: Avoiding emissions can be achieved by removing high-emissions technology, introducing energy and emissions monitoring, increasing efficiency, and switching to clean fuel and power sources.                                     
• Reuse or Store: Companies can employ a closed-loop system to reuse and recycle waste and plastic to remanufacture new items. The carbon emitted can also be stored for use or to avoid its release.
• Offset or Compensate: Companies can engage in practices such as reforestation and carbon credit purchases to offset environmentally harmful activities.

BCG’s Green Factory of the Future provides a comprehensive overview of what this can look like in practice.

A green transition requires time, information, skills, and, perhaps most importantly, financing. SMEs are faced with prioritizing short-term versus long-term gains. Governments, business support organizations, international organizations, and development firms must carefully work together towards developing green production regulations and initiatives which facilitate SME access to finance and strengthen their technical capacity to reduce waste and streamline processes to enable their green transition better.