The Role of SMEs in Economic Growth and Social Cohesion
Small and medium-sized enterprises (SMEs) play a crucial role in economic growth, job creation, regional development, and social cohesion in Latin America. According to the OECD’s “pymes Policy Index for ALC 2024” report, SMEs constitute 99.5% of companies in the region and account for 60% of formal employment. This group also includes microenterprises, which make up 9 out of 10 businesses in OECD countries.
Barriers to Sustainability for SMEs
Despite their significance, SMEs face several challenges in integrating sustainability practices. The first barrier is their limited resources. For a company with only 10 or 20 employees, allocating time and budget to gather environmental or social data may seem unrealistic when immediate concerns like payroll, liquidity, and competition take precedence.
The second barrier is the prioritization of immediate needs. If the return on investment isn’t clear in the short term, sustainability reporting is perceived as a luxury rather than a competitiveness strategy. This short-term perspective delays the integration of sustainability practices, although they could eventually differentiate a company in the market. However, as SMEs are part of the value chain for large corporations, they must start addressing ESG requirements to remain competitive and continue supplying larger companies.
The third limitation is lack of knowledge. Most SMEs are unfamiliar with international reference frameworks like the Global Reporting Initiative (GRI) or the European Sustainability Reporting Standards (ESRS). Even if they’ve heard of these frameworks, they perceive them as complex and designed for multinational corporations, not small businesses. This lack of clarity and simplified guidelines often leads SMEs to avoid starting sustainability reporting altogether, widening the transparency gap between large and small businesses.
The fourth barrier relates to incentives. In most Latin American countries, environmental policies don’t specifically address SME needs, and financial support for eco-friendly projects is scarce. While all countries have environmental regulations or strategies, only Colombia and Uruguay have made concrete efforts to tackle the unique challenges of SMEs in the region. However, even in these cases, strategies often lack clear goals, defined timelines, and expected impact assessments.
Moreover, financial incentives to promote sustainability in SMEs are very limited. Progress in this area is slow across most Latin American countries. Although some plans have been implemented to encourage greener business practices, they rarely target SMEs specifically. In many cases, donor-supported initiatives help bridge the funding gap needed for environmental investments.
Overcoming the Challenges
To help SMEs transition, a collaborative approach is needed. Governments, business chambers, and universities should provide simplified reporting tools, accessible funding, and practical training. SMEs account for over 90% of companies in countries like Mexico and are responsible for most formal employment. Overlooking their role in the sustainability transition is, at best, naive; at worst, a risk to national competitiveness.
Key Questions and Answers
- What hinders SMEs from integrating sustainability practices? Limited resources, prioritization of immediate needs, lack of knowledge about international frameworks, and insufficient incentives.
- Why are SMEs crucial for economic growth and social cohesion in Latin America? They constitute 99.5% of companies and account for 60% of formal employment in the region, playing a significant role in job creation and regional development.
- What are the main barriers SMEs face in sustainability reporting? Limited resources, short-term focus, lack of familiarity with international frameworks, and insufficient incentives.
- How can SMEs overcome these challenges? Through a collaborative approach involving governments, business chambers, and universities offering simplified reporting tools, accessible funding, and practical training.
