Ecosystem Resources

Harmonising Digital Economy Progress and Sustainability: MSMEs as catalysts

This article delves into the insights from the Elevandi and KPMG 2024 report on Project Savannah, exploring how Micro, Small and Medium Enterprises (MSMEs) can leverage digital Environmental, Social, and Governance (ESG) credentials to be catalysts not only for economic growth, but also for sustainability within ASEAN's rapidly digitalising society.

By Hamizah Myra, Research Assistant, Tech For Good Institute

As ASEAN gears up to accelerate their transformation into a leading digital economy through the ASEAN Digital Economy Framework Agreement (DEFA), we must confront a harsh reality. The acceleration of digital adoption and connectivity, while undeniably bringing economic benefits, also carries a substantial physical energy and carbon footprint. This footprint will only intensify as demand for data and infrastructure surges. While economic growth remains a priority for many ASEAN Member States (AMS), it’s clear that trends in digitalisation and sustainability will significantly influence the nature of this growth.

Micro, Small and Medium Enterprises (MSMEs) as a key enabler of sustainable economic growth

Encouragingly, studies indicate widespread awareness among organisations of the importance of sustainability amid economic growth. While 85% of Digital Economy Companies (DECs) expressed sustainability awareness according to the institute’s research, nearly 90% of MSMEs acknowledged the climate emergency based on a Carbon Trust survey in 2020. Yet this consciousness has struggled to translate into concrete actions for many enterprises, especially for MSMEs. Despite their climate awareness, MSMEs in Southeast Asia significantly contribute to industrial pollution as they emitted over 29 million tons of CO2 in 2021. Furthermore, MSMEs struggle to integrate environmental, social, and governance (ESG) reporting into their business practices.

However, this is not for the want of trying as there are significant barriers to MSMEs doing more which stymie sustainability progress for the region. Without proper support for MSMEs to advance their sustainability journey, ASEAN cannot harmonise its digital economy aspirations with sustainability.

ASEAN has taken significant steps to help small and medium-sized businesses (MSMEs) thrive in the digital economy. This includes the innovative DEFA agreement, which has tailored provisions to facilitate MSME involvement in cross-border digital trade and e-commerce. ASEAN Digital Ministers have also recently endorsed a Framework for Promoting the Growth of Digital Startups in ASEAN. However, more can still be done to help MSMEs become more sustainable.

This gap presents a unique opportunity – to weave sustainability into the very fabric of the region’s economic transformation by leveraging their over 70 million MSMEs. These nimble businesses, which comprises a staggering 97-99% of all establishments across ASEAN nations, are the unsung engines driving long-term economic growth and bridging development gaps. MSME’s sheer numbers and potential for collective impact positions them as a powerful force in mitigating the environmental impacts of digital transformation.

Empowering MSMEs through Project Savannah

This is where global initiatives such as Project Savannah come into play. Project Savannah, spearheaded by the United Nations Development Programme (UNDP), the Monetary Authority of Singapore (MAS), and the Global Legal Entity Identifier Foundation (GLEIF), aims to enhance MSME’s journey to sustainability through three pillars: metrics, technology, and opportunities. Specifically, the initiative seeks to leverage technology to simplify sustainability reporting for MSMEs by establishing a common ESG metric framework.

In view of Project Savannah’s objective, a key question emerges: How can this initiative be strategically implemented to ensure an inclusive transition towards ESG practices?

To address this pivotal question, Elevandi and KPMG’s Project Savannah report documents the roundtable discussion at the Singapore Fintech Festival 2023 amongst regulators, policymakers, industry leaders, and NGOs. The discussion explored the challenges faced by MSMEs in digitalisation and ESG reporting as well as possible strategies for Project Savannah to adopt to ensure effectiveness. Here are some key takeaways:

Existing ESG Frameworks pose barriers for MSMEs

The roundtable discussion laid bare the multifaceted challenges impeding the sustainability journey for MSMEs. The fragmented landscape of existing ESG frameworks that primarily cater to multinational corporations with large resources were a resounding concern among participants. This is because resource-strapped enterprises reportedly found these frameworks confining and overly complex as well as financially distressing. Coupled with technological constraints limiting data collection capabilities and a dearth of sustainability expertise, these hurdles have solidified ESG disclosure as an insurmountable barrier for many MSMEs.

No one-size-fits all: The need for regionally-contextualised ESG metrics

However, the discourse struck a resonant chord – the urgent need for a cohesive global framework that addresses the challenges and diversity of MSMEs white considering regional and sectoral specificities. Project Savannah advocates for leveraging the GLEIF’s Legal Entity Identifiers to facilitate efficient and cost-effective ESG reporting for MSMEs.

The project aims to develop flexible metrics that acknowledge regional and sectoral nuances while aligning with the UN Sustainable Development Goals (SDGs). These metrics, developed in collaboration with UNDP regional offices, will focus on quantifiable environmental measures like emissions and waste, as well as social impact indicators emphasising diversity, equity, and inclusion. Governance metrics will highlight the importance of regional compliance, business transparency, and accurate financial reporting. By consolidating existing standards into a unified global framework that considers the unique challenges and diverse contexts in which MSMEs operate, Project Savannah seeks to enable these businesses to effectively integrate sustainability into their business strategy and communicate their ESG credentials worldwide.

The role of ecosystem stakeholders

However, the issue of digital divide faced by MSMEs resulted in a clarion call to ecosystem stakeholders such as digital economy companies and platforms to serve as key players in this transition. Grab, for instance, has previously conducted Small Business Booster Programs across Southeast Asia, aiding MSMEs in embracing digital solutions and enhancing their online presence. A recent collaboration between GoTo and TikTok has also led to empowerment initiatives for Indonesian small businesses. The #MelokalDenganBatik campaign, for example, offered support to local batik entrepreneurs in Solo and Yogyakarta, equipping them with production technology and valuable insights on trends and inventory management.

Moreover, digital economy companies can offer tailored solutions to facilitate MSMEs’ initial foray into the digital economy and streamline ESG data processes. Online platforms can provide user-friendly tools, including digital payment systems, to mitigate MSMEs’ capital constraints and skill shortages. For example, Mastercard’s Farm Pass digital platform directly connects smallholder farmers to the agricultural and financial ecosystem, providing a digital marketplace, digital identity, and access to financial services to help overcome connectivity and digital skill barriers. This enables their entry into the digital economy and adoption of sustainable practices. Through collaboration with digital platform companies, MSMEs can access crucial support, while larger corporations can contribute by raising awareness of environmental concerns and dismantling financial barriers.

Leveraging ESG credentials

The benefits of digital ESG credentials are clear for everyone. Digital ESG credentials can facilitate an easy and cost-effective baseline implementation of ESG reporting for MSMEs. In doing so, MSMEs can verify and globally communicate their ESG credentials to develop a competitive edge, including access to green financing and an increase in cross-border supply chain opportunities. Ultimately, the project aspires to empower MSMEs to become active drivers of sustainable economic transformation.

Navigating the Path Forward for ASEAN’s climate-conscious MSMEs

As ASEAN propels towards a digital economy future accelerated by the groundbreaking ASEAN DEFA, the environmental impact looms large. However, for ASEAN’s climate-conscious MSMEs, Project Savannah represents a pivotal unlock – an empowerment tool to translate sustainability ambitions into tangible outcomes that harmonises with the region’s digital economy progress.

By leveraging its three pillars of metrics, technology, and opportunities, this global initiative empowers MSMEs including ASEAN’s own over 70 million to embrace sustainability through simplified digital ESG reporting. This paves the way for the region’s business backbone to position themselves as eco-conscious partners. Realising the interconnection between economic growth and a sustainability ethos depends on the collective efforts of all stakeholders, including MSMEs themselves, to steer their future towards sustainability.