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Small Firms, Big Impacts: Green Transition Must Embrace SMEs

Climate change is an existential threat. While numerous initiatives and policies have
emerged as a response, “climate action failure” is still recognized as the number one global
risk over the coming decade. To avoid irreversible damages to our people and planet, we
must step up actions for a green transition.

As this year’s G20 President, Indonesia has a unique opportunity to promote economic
pathways that speak to both growth and climate. In this area, the Kingdom of Denmark has
been an important partner for Indonesia. Indonesia-Denmark’s green partnership spans
over a decade and has expanded over the years. However, it could still be strengthened by
placing small-medium enterprises (SMEs) at the heart of it. SMEs form the majority of the
world’s firms, and their greening process is a crucial part of the global green puzzle.
SMEs are one of the most important pillars of the Indonesian economy. Based on data from
the Ministry of Cooperatives and SMEs, the number of SMEs reached 64.2 million as of
March 2021, with a 61.07% contribution to the GDP or an estimated value of IDR 8,573.89
trillion. The contribution of MSMEs to the Indonesian economy includes the ability to absorb
97% of the total workforce and collect up to 60.4% of total investments.

Unfortunately, SMEs are often overlooked in the green transition process, despite the
immense role they play in fostering innovation and building resilience in the economy - two
things that are needed in the green transition.

Indonesia-Denmark: A Strategic Partnership for a Sustainable Future
The green transition has made its way into Indonesian policies. For example, in May 2021,
President Joko “Jokowi” Widodo announced that no new coal power plants would be built in
the country after 2023, while promoting the acceleration of renewable energy deployment
(23% by 2025, and 31% by 2050) and setting the target to reach net-zero emissions by 2060
or sooner with international support. These commitments are strengthened by regulations
on carbon pricing and on a global level and by the country’s support to the Global Coal to
Clean Power Transition Statement at COP26. As G20 President, Indonesia has also chosen
energy transition as one of its three priorities, aiming for a global deal to accelerate the
process at the end of its tenure.

The Government of Indonesia needs to invest around USD150 billion to USD200 billion
annually on low carbon programs over the next decade to fulfil its climate ambitions. While
progress has been made, Indonesia’s green transition will undoubtedly move along faster
with the support of more partners.

The Kingdom of Denmark has been one such important partner for Indonesia. Bilateral
cooperation on climate and energy goes as far back as 2015 through the Strategic Sector
Cooperation. It has now expanded under the DKK 60 million (IDR 140 billion) Indonesia-
Denmark Energy Partnership Programme (INDODEPP) for the 2020-2025 period, with the
overall objective to contribute to decarbonization and low carbon development. Two years
into its implementation, a number of studies have been done to highlight the actual gap
between national targets for a green transition in the energy sector and provincial-level
plans. To enhance the outcomes of INDODEPP, a Meeting in Denmark’s Council for
Development Policy recommended an Enhanced Engagement under the INDODEPP (DKK 15
million) 2022 – 2025. Pending the approval of the Minister for Development Cooperation,
the engagement would enhance the outcomes of INDODEPP, while at the same time
supporting local development and increasing resilience to climate change.

One important lesson Indonesia can take from Denmark's energy transition process is how
public-private partnerships have operated as a catalyst. The relationship is complementary,
with the public sector providing ambitious long-term goals and stable framework conditions,
while the private sector supplies the innovation, solutions and investments needed to
achieve the visions.

Small Firms, Large Impact: Leveraging the Role of SMEs
Businesses of all sizes are important in the green transition and a key element of Denmark’s
green transition success is support from the private sector. Support from businesses and
industries has allowed for the implementation of new regulations and programs – all of
which have resulted in a reduction of carbon footprint, more efficient resource use, such as
50% of electricity supplied by wind and solar power, as well as an increased level of
sustainability in the country’s value chain. There are currently 14 climate partnerships
across a range of sectors in place to support the Government of Denmark’s 70% reduction

Small and medium enterprises (SMEs) are particularly important, as they constitute the
majority of businesses throughout the world. This is the case both in Indonesia and
Denmark, where SMEs make up around 99% of firms and consume about half of the energy
used by businesses. While their individual environmental footprint is small, they contribute
to a high amount of industrial pollution on aggregate, reflecting the large potential SMEs
have for green growth.

Vis-à-vis energy transition during Indonesia’s G20 Presidency, one of the topics highlighted
is the progress of accessibility, to ensure the principle of “leaving no one behind” is
implemented towards affordable, reliable, sustainable and modern energy for all. Indonesia
is committed to rapidly scale-up the widest variety of technologies and take a people-
centered approach. This is where SMEs in Indonesia should play their far-reaching role.

SMEs can contribute to green growth through eco-innovation, eco-adoption, or eco-
entrepreneurship. With consumers now more aware of their carbon footprint, some SMEs
have also shifted their business models towards more sustainable practices. Their
approaches vary, from providing services that protect the climate and environment, to
innovation of new technologies and products.

SMEs in Denmark have incrementally included circularity as a core part of their businesses
as part of the Green Circular Transformation. A study of over 600 Danish companies
revealed that environmental standards helped with the green transition and the
introduction of new technologies. In addition, the Clean Green Project involving 200 SMEs
across Denmark’s Zealand region has shown that SMEs can save energy and resources by
exploring greener ways of conducting their business.

Today, Denmark’s approx. 300,000 SMEs constitute 99% of all Danish companies. If we are
to take full advantage of the economic opportunities on the way to a greener world, it is
crucial that we take advantage of the momentum and help these smaller players become
“climate-ready”, and thereby be a part of national export numbers. One way Denmark is
doing so is the project SMV Klimaklar (translated: “climate-ready” SMEs). The project
provides guidance, support, and ways of measuring one’s footprint to some of the country’s
most promising SMEs.

The effect of having the CO2 footprint mapped is significant. The companies get an overview
of where they can achieve the greatest reductions from new investments and initiatives,
allowing them to establish feasible and profitable targets for their climate ambitions. As part
of the project, SMEs will be able to engage in dialogue with their sub-suppliers about
limiting CO2 emissions in connection with purchases. Finally, it becomes clear to the
companies how they can best communicate the work with the green transition to
customers, employees, investors, and other stakeholders. Essentially, the project seeks to
strengthen the companies' competitiveness to save energy and switch to renewable energy
sources. This will lead to strengthened competitiveness for Danish production companies
internationally and thus increase green exports, growth, and employment in Denmark.
Strengthening Indonesia-Denmark Green Partnership through SMEs

While SMEs undoubtedly play an important role in any country’s green transition, they are
still often overlooked by energy policy. This means that they are unable to contribute their
full potential to energy saving opportunities or carbon emission reductions. To accelerate
Indonesia’s green transition process, it is necessary to engage SMEs on energy and climate
change in general to ensure the greening of 50% of SMEs by 2030, as per the targets
outlined by Indonesia’s Ministry of Industry.

Although the switch to green business practices can enhance competitiveness, SMEs are
often reluctant to pursue this route. This is driven by technological and production
challenges specific to SMEs, such as access to financing, regulatory barriers and
informational deficits in the greening process. Ensuring that growth is green and that SMEs
are part of that growth will help make economies more competitive – nationally and

Danish companies that have undergone the green transition can partake in knowledge and
technological transfers to help Indonesian SMEs become more resource-efficient and reduce
waste in their business cycles. Practical help is needed during the green transition process of
both business models and physical premises of SMEs.

Racing to net-zero
Indonesia has the opportunity to play a big role in the global race towards net-zero
emission. At the same time, it is crucial for the government to ensure sustainable economic
development. Public, private, and community partnerships backed by international support
could help Indonesia’s green transition and enable the achievement of Indonesia’s
renewable energy and decarbonisation targets.

Acknowledging that energy demands will increase along with economic development and
population growth, achievement of Indonesia’s various climate ambitions rests on
participation from all sectors – from public institutions, private companies and communities.
Collaboration and innovation, in the form of financial and technical assistance, as well as
knowledge and technological transfers, are crucial to a just, and inclusive green transition
that leaves no one behind.

This article was originally published by the Jakarta Post.
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