Moreover, a seismic shift is fundamentally reshaping the dynamics of competition. For years, India has leaned heavily on its demographic dividend and low labor costs to maintain its footing in the global supply chain arena. However, a new mandate has emerged – one that places great emphasis on environmental, social, and governance (ESG) compliance. It is a clarion call that India must heed if it aspires to secure its place in the international marketplace.
Cost and demography provide a limited-period advantage
Low cost labor and a burgeoning working-age population have historically driven India’s competitive advantage in the global supply chain. While the average monthly minimum wage in India is roughly $65, it is close to $ 35 in Vietnam, which has emerged as a manufacturing hub in recent years. In neighbouring Bangladesh, it is approximately $72. India also has a larger working-age population than any other major economy. According to World Bank data for 2022, India’s population for ages 15-64 years was 96 million, compared to 67 million in Vietnam, which is one of the most rapidly ageing countries in the world. According to government data, India’s working-age population is set to grow to 988.5 million by 2036. By that same year, according to the UNFPA, Vietnam will transition from an “ageing” to an “aged” society.
However, labor costs constitute only a part of business costs. The business environment and tariffs, as well as the capabilities of the local supply chain, are other important factors. Government data also indicates that India’s demographic dividend is expected to run out by 2036, with the proportion of the country’s working-age population set to dip for the first time since 2011 that year, coupled with a consistent rising share of the ageing population.
ESG, an opportunity to differentiate
In a world increasingly attuned to sustainability concerns, the traditional metrics of competitive advantage are no longer sufficient. The globalisation of trade and the growing influence of conscientious consumers are steering global brands toward a heightened focus on ESG compliance from their suppliers.Fashion retailer H&M, for instance, prioritises transparency and sustainability in its supply chain. Suppliers working with an H&M Group brand must sign its sustainability commitment. H&M assesses its suppliers’ social and environmental performance using the Higg Facility Environmental Module (FEM) and the Higg Facility Social and Labor Module (FSLM). Under its Sustainable Impact Partnership Program, it rewards high-achieving and responsible suppliers with training opportunities and long term contracts.Similarly, tech giant Apple has been working to make its entire global supply chain carbon-neutral by 2030. Some of its biggest suppliers like Foxconn are part of its clean energy program. In April this year, Apple said 250 of its suppliers, representing about 85% of its direct manufacturing spending, have pledged to use renewable energy for production. Apple said its suppliers are supporting 13 gigawatts of active renewable energy projects and have made commitments to support an eventual total of 20 gigawatts of projects.
With international buyers placing increasing emphasis on the environmental and social aspects of supply chain management, Indian enterprises must wholeheartedly embrace ESG principles to ensure their continued competitiveness on the global stage.
The challenges of the pivot
Adapting to the new demands on vendors can be daunting for MSMEs. The investment required to transition to sustainable practices, adopt cleaner technologies, and enhance worker well-being might appear prohibitive. The sector’s limited access to capital further exacerbates these challenges. Moreover, sourcing and processing data to respond to disclosure requests from international buyers can be overwhelming without a support system that facilitates ESG reporting.
A survey by DBS and Bloomberg Media studios in August 2022 revealed that 92% of Indian SMEs considered ESG adoption a high priority for their business, and accorded their focus on ESG as a requirement to be a part of the global value chain. However, SMEs also cited several challenges associated with ESG adoption. These include the cost of deployment of ESG initiatives coupled with ROI assessments of ESG investments (57%), lack of knowledge of how to measure the success of their ESG projects (87%) and how to implement ESG frameworks and solutions (81%). Other concerns include failure to ensure compliance (75%) and lack of funding (60%).
Government, a key enabler can lead the solution
In navigating these complexities, the government must play a pivotal role in creating an ecosystem where MSMEs can thrive while contributing to a more sustainable and equitable future. In particular, three key aspects of government support can catalyse a sustainable transformation within the sector:
Clear ESG guidelines and certification: The government should establish simple, concise, and unambiguous ESG guidelines specifically tailored to the MSME sector. These guidelines should serve as the foundation for a certification program rewarding compliant MSMEs with a recognised ESG label that signifies their commitment to sustainability and ethical business practices.
Streamlined ESG reporting for MSMEs: It is critical that the government steps in with an ESG reporting framework tailored to the specific needs of MSMEs. In crafting this framework, the government must exclude indicators (such as excise) that hold little relevance to the unique characteristics of these enterprises. It should also involve a substantially streamlined disclosure process compared to prevailing standards like the Global Reporting Initiative (GRI), while promoting the adoption of simplified metrics and reporting methods. The framework should be firmly rooted in uncomplicated measurement principles and disclosures that leverage readily accessible data sources. It could also facilitate simplified assessments of materiality and sphere of influence. To facilitate accessibility and comprehension, it is imperative that the framework be composed in plain, easily understandable language.
Supportive ecosystem for ESG adoption: To alleviate the financial burden of ESG compliance on MSMEs, the government can offer a range of incentives to encourage ESG investments. Tax breaks, subsidies, and low-interest loans for enterprises embarking on sustainability initiatives can lighten their cost load. The government should also foster collaboration between industry associations and financial institutions to create accessible financing options for MSMEs looking to invest in ESG initiatives. Additionally, government-sponsored training programs and workshops can equip MSMEs with the knowledge and skills necessary to implement ESG practices effectively.
India’s MSME sector stands at a crossroads, facing the imperative of embracing ESG as a competitive advantage in the global market. The shift from traditional competitive factors to a more holistic view of business sustainability is not only necessary but also inevitable. By introducing simple and standardised ESG disclosure and certification, and by providing necessary guidance, incentives, and support, the government can catalyse ESG adoption and empower the MSME sector to chart a path to enduring success.
The writer is Managing Director- Head, Asia, FSG.
