Applying an SME lens to environmental and social performance standards
Small and medium enterprises (SMEs) play a critical role in the development of emerging economies. Yet, the IFC estimates a $5.2 trillion finance gap in developing countries for micro, small and medium-sized enterprises. Investors are increasing their direct and indirect investment in SME finance, including banks downscaling from corporate to SMEs and microfinance institutions (MFIs) upscaling from micro-entrepreneurs to SMEs.
As SME portfolios grow, investors increasingly recognize the cumulative risks and impacts of multiple small and medium enterprises on the environment and the communities. Common risks in SME finance may relate to waste and effluent management, toxic materials, occupational health and safety, labor conditions for SME employees and other environmental and social risks. This calls for a simplified version of the Environmental and Social Management System (ESMS) principles - well established in corporate and project finance - commensurate to the level of risks, impacts and opportunities faced by SME financial service providers (FSP).
The primary goal of this study is to provide a framework for investors to assess the sustainable performance of SME FSPs. By doing so, the study also provides some guidance to SME FSPs on good ESMS practices.