SMEs and climate resilience

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Vulnerable communities face the brunt of climate change — from rising sea levels and extreme weather events to prolonged severe droughts and flooding. According to the World Bank, without effective mitigation measures, climate change could push more than 100 million people into poverty by 2030.
To help the most vulnerable communities become more resilient to the effects of climate change, financial institutions should support small and medium-size enterprises. When an SME builds up its own climate resilience, it can have cascading effects in the community around it.
Unfortunately, SME owners generally have trouble securing bank loans, and instead must turn to informal lending and alternative funding sources to support their businesses. According to the World Bank, 50 percent of formal SMEs lack access to formal credit, and the total credit gap for both formal and informal SMEs is as high as $2.6 trillion worldwide. While the gap varies considerably among regions, it is particularly wide in Africa and Asia.
Microfinance can close this gap by providing the small loans that SMEs need to get off the ground and thrive. The role of microfinance in boosting SMEs’ climate-change resilience needs to be more fully defined. In Africa, Asia and Latin America, microfinance has enabled SMEs to invest in drought-resistant crops, build better irrigation systems, and purchase climate insurance to protect incomes when crops fail because of too much — or too little — rainfall.
These projects already have a proven track record. Microfinance can also help SMEs transition to low-carbon business models, by financing their efforts to adopt renewable energy sources and shift to sustainable production and supply chains.
Microfinance is not the only solution, and it certainly has its critics. To allay concerns about money being poorly spent, microfinance institutions should reward SME owners who use loans to finance climate-change resilience and renewable-energy projects. This need not be an act of corporate social responsibility. In fact, according to the Business and Sustainable Development Commission, which I chair, such an approach is in microfinance institutions’ own self-interest.
The private sector should understand that the climate crisis is also an opportunity, especially with regard to SMEs. In fact, some in the private sector already recognize this.
There are also opportunities in peer-to-peer lending networks, whereby online services match lenders directly with borrowers. P2P micro-lending platforms such as lendwithcare.org, Lendico and RainFin have proved popular, and could re-energize the microfinance community and provide wider access to loans for SMEs in developing countries. Financial products like weather derivatives — which insure the harvests and enterprises of SMEs and some of the world’s poorest people — also have potential.
If the world is serious about mitigating the worst effects of climate change, especially its disproportionate impact on vulnerable communities, both the public and private sectors should support efforts to extend micro-financing to SMEs. Those on the front line of protecting lives and livelihoods can’t go it alone.