Collective initiatives, including an enabling access to finance and focusing on incentives, are crucial to accelerate micro, small and medium enterprises’ (MSMEs) adoption of the circular economy (CE) in Southeast Asia given opportunities related to their transitioning, according to a study.
The publication, Study on MSME Participation in the Circular Economy, said access to finance and suitable funding avenues could be essential for MSMEs seeking to improve their sustainability performance and/or introduce innovations within a CE.
It underscored the need to offer MSMEs a variety of finance instruments, including grants, low-interest loans and tax incentives for businesses willing to exceed regulatory requirements and invest in more sustainable technologies.
“Sustainable finance instruments that integrate economic growth, environmental protection and social inclusion dimensions (impact investment fund, green microfinance, sustainability-linked loans) can provide MSMEs with additional capital access,” it added.
In designing interventions and instruments for MSMEs transitioning to the CE, the study proposed to ASEAN policymakers to focus on incentives, raising awareness on the impact of the CE on ASEAN trade, capacity building, collaboration through matchmaking and regulatory sandboxes.
It said fiscal incentives, such as subsidies and tax holidays, demonstrate government support for CE practices and encourage MSMEs to invest in CE strategies.
For non-fiscal incentives, governments can create market demand for circular products from MSMEs through the facilitation of green public procurement, it added.
Citing an earlier report published by the Organization for Economic Co-operation and Development, the study said encouraging larger companies to apply pressure on their supply chains can also support the development of domestic demand for circular products.
“While MSMEs have benefited from government-led capacity-building efforts, particularly in raising awareness, they require more technical support, including mentorship, consultancy, training on transition plans, legal assistance and certification of products and services to accelerate their transition to CE models,” it said.
The survey findings documented that only 57 percent of ASEAN MSMEs were familiar with CE concepts, and 43 percent had a limited understanding of the CE.
The study also shows that geographical constraints cluster knowledge gaps. The demand for knowledge in circular business models is exceptionally high in the Philippines, Vietnam, Singapore, and Lao PDR.
The sectors most knowledgeable about the CE include food and beverages, craft and creative industry, consultation services, agriculture, trade and retail, and fashion and textiles.
Common CE practices among ASEAN MSMEs are digitalization (62 percent), material optimization (59 percent) and energy efficiency (59 percent).
“Despite their familiarity with the term ‘circular economy’, MSMEs still lack an understanding of the benefits of CE business practices. MSMES must recognise that adopting these practices can yield significant advantages beyond environmental impact, including internal benefits such as cost savings, enhanced resource and material security and customer retention. Being aware of these benefits can simplify the transition process for MSMEs,” it said, citing an earlier paper.
To encourage this shift, the study underscored the importance of sharing the experiences and success stories of fellow businesses that can motivate other MSMEs to start their journey in the CE.
“On the other hand, it is crucial to communicate CE regulations and policy frameworks to MSMEs regularly,” it said. “Best practices should be shared with specific sectors to ensure relevance and immediate applicability.”
The study also highlighted substantial opportunities for global market demand for green and circular products, which are increasingly in demand.
“This trend presents a chance for MSMEs that utilize eco-friendly and traceable materials to expand their market reach, especially MSMEs that are supplying to the export market. Governments have the opportunity to support MSMEs throughout the value chain to meet international standards,” it added.
It also cited support from platforms such as ASEAN Access and the ASEAN Circular Economy Stakeholder Platform (ACESP).
Meanwhile, the study was prepared with the support of the SME Promotion in ASEAN II project, which is implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and funded by the German Federal Ministry for Economic Cooperation and Development.
