MSMEs Critical for a Greener Future in Southeast Asia

This article is published in collaboration with the Tech for Good Institute.

The COVID-19 pandemic catalyzed rapid digital transformation across business, government, and society in Southeast Asia, with approximately 10% of the 400 million active internet users based in Indonesia, Malaysia, Singapore, Thailand, Philippines and Viet Nam only starting to use the internet during the pandemic. Furthermore, half of these users have now adopted mobile internet and digital payments.

These trends indicate the urgency of digital transformation for micro, small, and medium-sized enterprises (MSMEs) that form the backbone of the Southeast Asian economy. Data from the Asian Development Bank (ADB) shows that the estimated 71 million MSMEs in Southeast Asia likely account for at least 97% of all businesses in the region, employing 67% of the working population. While many companies began or accelerated their digital journeys during the pandemic, only one in five MSMEs are currently serving customers on online-to-offline platforms.

At the same time, the push for reducing the environmental footprint of the digital economy is more urgent than ever. Southeast Asia is particularly vulnerable to the effects of climate change, with citizens and MSMEs bearing the brunt of both fast-onset climate-induced disasters and the longer-term impact of global warming. As the digital economy accounts for its environmental impact, large technology companies are actively looking to lower their carbon footprint. While these efforts are necessary, they are not sufficient in Southeast Asia. MSMEs are a key factor if the region is to successfully navigate this transition.

Challenges 

As with the process of digitalization, pivoting toward greener business models is challenging for MSMEs.

This is not for want of trying. A survey published in 2020 by global initiative Carbon Trust showed that almost 90% of MSMEs were aware of the fact that there is an ongoing climate emergency and were in support of efforts to stem it. Yet the same study found that there remains formidable barriers to MSMEs doing more, stymieing progress.

Firstly, for many of these MSMEs access to finance remains a key concern, with small firms facing difficulties funding investments to reduce their footprints, especially if they do not explicitly contribute to the financial sustainability of their core business. In fact, lack of access to financing in general remains an obstacle—60% of Southeast Asian MSMEs surveyed in the Tech for Good Institute’s 2021 Platform Economy report were unable to obtain the needed loans from traditional financial institutions. 

Furthermore, these MSMEs often face a capacity and expertise gap—many struggle with sustainability efforts due to the fact that they lack training or advice from local experts on how to do so, and are unable to undertake or invest in large scale upskilling due to lack of time or manpower. The new U-Energy initiative by Singapore’s United Overseas Bank seeks to address this gap by providing a platform for MSMEs to connect with partner energy service companies that are interested in supporting energy efficiency projects, though much more work remains to be done for MSMEs across the region to easily access similar opportunities.

Finally, governments can emphasize the positive cost-benefit calculus that MSMEs face in switching toward greener alternatives. For instance, while abatement costs incurred from switching to more energy or water efficient equipment may appear high in the short term, lower utility bills are likely to provide significant savings in the long run. The European Union-supported METABUILD project serves as testament to this fact, creating aggregated annual savings of €2.9 million ($3.11 million) through increased resource and energy efficiency via the implementation of resource-efficient cleaner production measures in 403 metal product industries across Bangladesh, Nepal, and Sri Lanka.

The potential role of platform companies 

Opportunities and potential partners to help MSMEs pivot toward more sustainable models also exist elsewhere. In Southeast Asia especially, digital platform companies in the form of information platforms like Google or Facebook, or online-to-offline platforms like Tokopedia, Grab, Lazada, and Shopee, provide many MSMEs their first foray into e-commerce and digital trade. These platforms simplified a digitalization process that was once perceived as unfathomable, providing end-to-end support in marketing, fulfilment and logistics, customer support, and business optimization with big data.

Notably, these platform businesses typically only facilitate exchange and connection without exerting control over the entire value or supply chain. Hence, their environmental impact—positive or negative—is largely realized through their networks of consumers, merchants, drivers, and other partners that they serve. 

On the other hand, they retain uniquely influential relationships with MSMEs and can help MSMEs build awareness of environmental issues and reduce the financial or information barriers to action.

For example, the leading players in the ride-hailing space, Gojek and Grab, have both started piloting initiatives to advance the sustainable transport agenda, partnering with battery-swapping refueling platform Gogoro and Indonesia's state-owned oil and gas company Pertamina respectively to offer battery swap stations that make it easier and cheaper for individual drivers to switch to electric options. Grab and Hyundai have also rolled out customized maintenance packages to support drivers renting Hyundai electric vehicles, reducing financial barriers and facilitating shifts to cleaner fleets.

In the food delivery space, Foodpanda’s cutlery opt-out toggle has prompted collective action by consumers to save over 160 million pieces of single-use cutlery in the 3 years since its launch in late-2017.

Not only can digital platforms enable a green agenda through their own strategies, policies, and practices, the nature of their business model holds the potential to drive sustainability across entire economies as they increasingly digitalize.

Working with MSMEs to solve everyday problems in a sustainable manner

While traditional businesses seek to transform their existing businesses, innovative digital-native companies are increasingly also working with MSMEs to solve Southeast Asia’s everyday problems in a sustainable manner. One area that has seen significant innovation is in the agritech sector, solving the everyday problems of smallholder farms.

MimosaTEK, a Vietnamese startup, employs an internet-connected system to help smallholder farmers work more effectively and sustainably. By placing moisture, temperature, precipitation, and wind sensors on farms, MimosaTEK is able to generate irrigation recommendations in real time, sending these updates to farmers via a smartphone app. This process has not only improved crop health but also reduced water wastage. As of 2022, MimosaTEK has reached over 180 farming households, working toward a more sustainable future while also saving time and money.

Indonesia’s eFishery startup focusing on aquaculture intelligence has also helped improve smallholder productivity and sustainability. Traditionally underserved due to lack of scale, over 30,000 MSME farmers have now benefited from eFishery’s affordable vibration-based smart feeders that help farmers detect when fish are hungry, automating and optimizing the feeding process. This helps reduce time, labor, and most significantly feed costs (which comprise up to 90% of all costs), while also minimizing water pollution caused by the nitrogen generated from excess feed. Given its success, eFishery closed a $90 million Series C funding round led by Temasek, SoftBank, and Sequoia in 2022.

The path forward

MSMEs are embedded within the communities they serve across Southeast Asia. They are the first and last mile of the economy. As such, more concerted support for MSMEs to chart a greener way forward is needed, from governments, platform companies, and new digital solutions providers. In this way, the impact of technology and the digital economy can collectively be realized for a low-carbon, inclusive future for the region. 

This article was first published by the Tech for Good Institute on 13 June 2022.