KUALA LUMPUR (April 8): To push more small and medium enterprises (SMEs) to decarbonise, there must be a business case to compel them to start the journey, along with top-down regulations to mandate actions like sustainability reporting.

These were among the findings presented by the United Nations Development Programme (UNDP) at the “Building supply chain resilience: Insights into greening value chains for Asean” panel on Tuesday, organised by Bank Negara Malaysia (BNM), UNDP and the Asian Development Bank at the Kuala Lumpur Convention Centre.

The findings are part of the Greening Value Chain (GVC) Playbook that will be launched later this week. The playbook will highlight lessons from the implementation of BNM’s GVC programme in 2022, which assists Malaysian SMEs to adopt sustainability by offering technical advice, access to relevant tools and green financing.

“A central element of this programme is the role of anchor companies — typically large corporates — to support SMEs within their respective value chains. More than 330 SMEs have undergone technical training since the start of the programme, and nearly half have started to measure and report their greenhouse gas emissions,” said BNM assistant governor Madelena Mohamed during her speech.

Similar to Malaysia, SMEs account for over 90% of Asean business ecosystems, and many face limitations, whether it is financial constraints or lack of expertise, to begin decarbonising. However, these SMEs could be left behind and suffer from climate change impacts if they fail to transition.

“Export-oriented SMEs in Asean are at risk of losing US$237.5 billion in potential revenue if they fail to transition to greener and sustainable practices,” she said.

The playbook is therefore developed as a shared resource for Asean, where decarbonising SMEs is also crucial for the countries to meet their net-zero targets.

“Beyond capturing valuable lessons from Malaysia’s experience, the playbook serves as a practice resource for policymakers, financial institutions and businesses across Asean looking to integrate sustainability into their value chains,” she said.

UNDP conducted interviews with 54 stakeholders, comprising SMEs, financial institutions, large corporations and government agencies, to understand the challenges that SMEs face in tracking and managing their greenhouse gas emissions, and to provide suggestions on how the GVC model can be scaled to the rest of the region.

Three key challenges were identified, alongside tactical levers and key steps that can be taken to address the problems.

One of the challenges observed by UNDP was that SMEs did not feel pushed by regulators to decarbonise, nor did they experience the pull factor from the market to begin this journey.

Therefore, the UNDP suggests in the report creating a top-down demand by mandating Scope 3 disclosures — which include indirect emissions from suppliers — from public-listed companies and government-linked companies. Additionally, there could be a phase in of Scopes 1 and 2 reporting — for direct and indirect emissions, such as from electricity use — for SMEs, with manageable steps.

But these must be done by pairing mandates with incentives over a clear time horizon. The SMEs surveyed by the UNDP, for instance, reflected that five years is a comfortable time frame for them to prepare sufficient resources to comply with such regulations.

Another challenge identified was the capacity gap, where SMEs struggle to understand carbon accounting. On this issue, the UNDP observed that carbon emission factors could be compared to currency exchange rates, allowing SMEs to easily calculate their emissions baseline.

The UNDP noted that many SMEs are not aware of the wealth of resources available in Malaysia to help them get started. More can be done to highlight the presence of these tools, and the UNDP suggested countries establish a carbon literacy baseline and subsidise courses for people to acquire the basic understanding of these matters.

Lastly, the many frameworks and requirements related to sustainability have engendered confusion among SMEs. To address this, the requirements should be harmonised, and the narrative reframed to focus on the business case to adopt sustainability. This could be done by highlighting cost savings, growing consumer demand and the potential to generate new revenue by adopting greener practices.