Navigating the Green Maze: Common Challenges in Small Businesses’ Sustainability Efforts

Globally, sustainability has been at loggerheads with economic growth, where economic growth is a finite process but Earth has finite resources. This oxymoron¹ shows that the world needs to understand the essence of sustainability since modern culture is still strong. Thus, it becomes pertinent to reduce the environmental effects of this economic growth. Businesses are increasingly recognizing the need to reduce their carbon footprint and making sustainability a core priority in their strategy. For this, Corporate Social Responsibility (CSR) has been on the rise where companies think beyond the traditional mindset of making profits and investing in the principles of human rights, conservation, waste reduction, community development, and employment through fundraising, supporting green initiatives, and using ethically sourced raw material.

These initiatives have yielded businesses benefits of lower costs, improved employee behavior, enhanced reputation, and a competitive advantage. Such advantages have been borne by large companies. An exemplary case is Sutlej Textiles, which achieved a remarkable cost-saving of Rs 283.47 crore in FY’22 through the implementation of cost-free measures, simultaneously conserving 2896 kWh/day of energy and 831.3 tons of pet coke daily. Building on this success, they further saved Rs. 92.48 crore in FY’23 from the cost-free measures, preserving 680 kWh/day of energy and 357.53 tons of pet coke per day (Details of measures in Annexure 1).

It is often believed that sustainability is the forte of larger corporations because they have the necessary resources and financial capacities. However, small businesses with their nimble structures and close community ties can lead sustainability practices that large corporations cannot². For instance, the small business Sui³, which operates in India and Singapore, uses herbal dyes and fabrics like organic cotton, hemp, linen, and other handwoven textiles to produce garments. Moreover, this slow fashion brand works with vetted NGOs within India to support underprivileged women in the handloom sector.

Despite being able to engage with the local community, revive the lost craftsmanship, and use eco-friendly materials of production, these enterprises undermine their abilities, fear the higher initial investments, and face numerous challenges such as lack of information, wrong investment decisions, and problems in communication and strategizing to name a few while making any sustainable decision. The few on the path of sustainability are still not seeing their stock prices escalating; further, their investments are not materializing the desired sustainability targets.

Challenges for Small Businesses

Lack of Information: The ambiguous point of where to start arises from the lack of information in the company. As per the SIDBI survey⁴, only 17% of MSMEs have started with sustainability policies in their organization, while 9% of the companies have not started sustainability operations, as reported by Morgan Stanley⁵. It also noted that 19% of the companies lack corporate leadership, skills, and experience in sustainability. Further, the complex frameworks and standards relating to sustainability measurement, and reporting put an additional burden on the organization’s leadership. A survey of 500 SMEs in the UK by Rimm Sustainability⁶ shows that 36% are concerned about the same and find it challenging.

Knowledge gap among organization’s leadership: Only 1 in 4 MSMEs claim to have internal expertise to implement diverse sustainability measures, as per SIDBI survey. Further, a significant finding from recent assessments indicates that only one-third of corporate boards possess expertise in sustainability, while over half admit to having limited understanding of sustainability-related regulations. This knowledge gap often relegates sustainability to the periphery of core business strategies and occasionally results in misguided investment choices made merely to create a favorable appearance.

Problems in Communication and Reporting: Rimm Sustainability reported that 39% of the MSMEs feel that sustainability reporting costs too much. As per Morgan Stanley, 60% of companies find it difficult to communicate sustainability's business value. These factors coupled with a lack of knowledge in leadership positions make it challenging to understand the frameworks in which reporting is to be done. Thus, it places an additional burden on the company to recruit professionals with expertise in sustainability, which might be difficult for MSMEs to afford.

Inability to obtain finance: SIDBI reported that only 1 in 3 MSMEs are aware of green financing and the impact of sustainability on improving brand image and competitiveness. Further, in a 2023 SME Climate Hub survey⁷, 55% of respondents identified the lack of funds as a key reason for limited action on climate change and nearly 70% stated that they need additional funds to take action or accelerate their progress on emission reductions. This is attributed to the scenario that financial institutions require granular details about clients’ sustainable performance before investing to manage risks, develop financing instruments, and meet reporting requirements. However, due to limited capacities and resources, SMEs are unequipped to measure and report their environmental performance leading them to lose their options for obtaining finance.

What small businesses are doing wrong?

Avoid measuring emissions and setting targets: Most MSMEs do not quantify the emissions generated through the production processes in their individual/collective units. Morgan Stanley also reported that about 1/4th of the companies find difficulty in setting or measuring targets. As per the latest SBTi database, more than 900 textile and fashion companies are registered on SBTi and only 170 are MSMEs. This low penetration of SBTi among MSMEs in textiles shows either a lack of information or negligence and reluctance to set up sustainability targets for the company. A country-wise penetration of SBTi globally among Companies and MSMEs is shown in Annexure 2. Here, third party “carbon accounting” software Greenstitch comes in handy, which understands the textile sector-specific criteria that are to be fulfilled for a target to be accepted as science-based and thus can be helpful in setting up targets.

Focussing on short-term gains: MSMEs and companies associate sustainability with very significant investments in the short term as depicted by the report Sustainability Signals of Morgan Stanley, which says that 31% of the companies believe that this is a significant barrier in establishing a sustainability strategy in the company. But this picture is juxtaposed by the fact that 76% of companies believe that sustainability will lower the cost of equity and/or debt for their company in the next five years, even if it is negative for financial metrics. Thus, companies have to focus on long-term gains instead of short-term since, since even from an investor’s point of view, it is essential to incorporate sustainability in their corporate strategy.

Not Securing Employee Buy-in: Morgan Stanley has shown that 21% of the companies face a lack of data to inform sustainability strategy. Employees are at the forefront of collecting this necessary sustainability data and are directly involved in sustainability practices such as recycling, reducing paper usage, and managing energy consumption effectively. Their daily commitment to follow these practices can significantly improve the organization’s sustainability performance. Thus, organizations need to involve their employees and their feedback while developing their sustainability strategy.

Where to Start?

Don’t go for big fish: MSMEs should concentrate on low-cost initiatives before making investments in the setting of huge infrastructures. For instance, Sutlej Textiles adopted various cost-effective initiatives such as reducing steam dyeing ratios, utilizing supply air fans for humidity control, addressing air leakages to enhance boiler efficiency, transitioning to LED lighting from less efficient options, and employing energy-efficient pumps which saved Rs 283.47 crore in FY’22 while simultaneously conserving 2896 kWh/day of energy and 831.3 tons of pet coke daily. Companies can adopt the expertise of specialists such as Greenstitch which can help in supply chain decarbonisation by identifying the hotspots of carbon intensiveness.

Carbon accounting: Measuring emissions has been pertinent for organizations to attract investors to put their money in a company. Thus, with the development of various AI tools and climate software such as GreenStich, MSME can measure and track their emissions in the supply chain while simultaneously accounting for all “Scope 1, 2, and 3 emissions”. Greenstitch has reduced the manual efforts by integrating the old databases and sustainability reports in its systems and produce latest fashion ESG reports.

Training of employees: Placing employees at the forefront of crafting a sustainability strategy is paramount. Organizing regular training sessions and facilitating exchange programs with larger and medium-sized enterprises can provide valuable insights into effective sustainability strategies and aid in devising implementation methods tailored to their respective organizations. Implementing performance management indicators linked to sustainability goals will foster motivation and drive progress. The ultimate objective is to instill a sense of ownership among employees toward the organization's sustainability objectives.

Engagement with the community: Joining local green business networks can help leverage knowledge spillovers and provide access to resources and support. This would be crucial in understanding local regulations, programs, and benefits that are accrued to the SMEs if they adopt sustainable strategies. Further, developing networks and connections can help in developing strategic partnerships. For instance, Niaga (“again” in reverse), a Dutch start-up, founded in 2010 developed a fully recycled carpet material with fiber-binding technology. However, they lacked a proper adhesive that was available with Royal DSM, a Dutch multinational corporation. The companies initiated a joint venture. The partnership allowed Niaga to commercialize its innovation in 2015. Together, Niaga and DSM have developed over seven patent families since their collaboration began.

Dedicated team for sustainability: Numerous MSMEs have highlighted in various surveys that the process of reporting incurs additional costs. However, they must prioritize long-term goals over short-term challenges. The number of companies appointing Chief Sustainability Officers jumped threefold in 2021⁸. Establishing a team of proficient professionals dedicated to measuring and reporting emissions with expertise is crucial, as it serves as an initial step toward formulating a robust sustainability strategy. Several companies, including Greenstitch, offer specialized services for fashion ESG reporting, carbon accounting, traceability, product life cycle analysis. By availing these services, MSMEs not only fulfill regulatory obligations but also enhance investor confidence in their operations.

For more insights on the challenges faced by small businesses in adopting sustainability: reach out to us at narendra@greenstitch.io.

Annexures

Annexure 1: Sustainability Initiatives by Sutlej Textiles Limited

Table 1: No cost/minimum cost sustainability measures undertaken by Sutlej Textiles Limited in FY 2021-22

Table 2: No cost/ minimum cost Sustainability measures undertaken by Sutlej Textiles Limited in FY 2022-23

Annexure 2: Data showing Country-wise penetration of SBTi globally in the textiles sector among Companies and MSMEs

References

• Knowledge

• Sustainability in Textiles