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Financing for SMEs in Sustainable Global Value Chains

By joining global value chains (GVCs), small and medium enterprises (SMEs) can contribute to development in emerging economies. There is evidence that countries and firms grow faster when they are integrated with GVCs.

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GVC participation among emerging world SMEs is uneven. Lack of access to financial services is a major reason why. Although SMEs account for large shares of employment and GDP, they are often unable to get credit, and women-owned SMEs face particularly high obstacles.

Sustainability standards increasingly govern global value chains. Some of these standards are voluntary, while others are mandatory. Examples include national regulations covering environmental protection, and voluntary sustainability platforms such as fair trade or organic certification.

Lead firms often expect their suppliers to comply with labor and environmental criteria before joining their value chain. Some evidence suggests that meeting these standards makes firms more profitable. Workers and the environment might also benefit. Yet standards also impose costs, and as discussed in this paper, there is ongoing debate about whether standards ultimately benefit SMEs. A lack of financing is a major reason SMEs struggle to meet these costs.

Governments, lenders and businesses offer financial and technical assistance to help SMEs upgrade their sustainability performance.

Development finance institutions offer lines of credit to banks in emerging countries so they can lend to local SMEs. Some development finance institutions also provide loan guarantees as well as technical advice for meeting standards.

Investors and lenders provide loans or equity directly to SMEs. Nonprofit organizations offer affordable financing to SMEs to upgrade their sustainability practices. Some commercial banks screen applicants against sustainability criteria and offer better terms in exchange for strong performance. Investors of all kinds increasingly seek sustainability-related disclosures from investees. Sustainable stock indices reflect the growing business interest in sustainability.