As the global community accelerates efforts to meet net-zero goals, a major oversight continues to hamper progress: the near-complete exclusion of micro, small, and medium enterprises (MSMEs) from the climate finance agenda.

Despite making up over 90% of businesses worldwide and providing more than half of global employment, MSMEs receive less than 2% of climate finance flows. This isn’t just an equity issue—it’s a structural flaw that could stall the just and inclusive transition the world urgently needs.

The Overlooked Climate Contributors

Many MSMEs are already contributing to climate action. From clean energy startups in East Africa to agri-tech platforms in Southeast Asia and solar pump providers in India, small businesses are innovating on the frontlines. But the vast majority remain excluded from climate capital, held back by a maze of financial and institutional barriers.

These enterprises typically occupy a “financing gray zone”: too large for microfinance, too informal for mainstream investors, and too small to navigate complex environmental, social, and governance (ESG) requirements. They often lack access to sustainability tools, reporting platforms, or affordable green capital—tools that are now table stakes for accessing climate-linked funding.

India: A Crucial Test Case

India offers a revealing lens into this global challenge. With its vast and diverse base of MSMEs—contributing over 30% to GDP and nearly half of exports—the country reflects both the untapped potential and structural roadblocks facing small businesses in the green transition.

Most Indian MSMEs are unaware of available financial instruments, including green credit lines, and face structural barriers like high upfront costs and a lack of tailored financial products. Green bonds and ESG-linked loans remain largely out of reach due to their complexity and cost.

Another obstacle is the absence of mandatory sustainability disclosures.

Without clear reporting standards or tools, many small businesses can’t demonstrate their environmental performance in ways financiers require. But perhaps the most entrenched barrier is perception: many financial institutions still view MSMEs as high-risk and low-return, even in sectors where they often outperform larger players in agility and innovation.

Add to this India-specific challenges such as limited working capital, low awareness about green practices, and scarce technical support, and the result is a self-reinforcing cycle of exclusion. Just as MSMEs are poised to help green the economy, they are locked out of the financial systems that could enable their transition.

Smart Economics, Smarter Climate Strategy

Unlocking climate finance for MSMEs isn’t charity—it’s smart economics. If even a portion of the world’s small businesses had access to structured green finance, the adoption of decentralized renewables, circular economy practices, and low-emission production models would surge. The ripple effects would be transformative: more green jobs, more resilient livelihoods, and real progress in hard-to-decarbonise sectors.

India is already laying groundwork for change. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has extended approximately US$48 billion in credit guarantees over the past two years. The government aims to add another US$60 billion in the coming years, improving credit access for MSMEs.

Institutions like the Small Industries Development Bank of India (SIDBI) are scaling up dedicated green financing programs. SIDBI has launched initiatives such as the Green Climate Fund-supported lines of credit and specialised schemes for energy efficiency and clean technology adoption among MSMEs.

These efforts aim to bridge the gap between small enterprises and sustainable finance green credit facilities, and social enterprises such as SELCO Foundation are helping last-mile entrepreneurs reduce upfront costs and access cleaner technologies. These are promising models that point to a broader shift—but they need scale and sustained policy support.

Redesigning the Financial Architecture

To fully bring MSMEs into the climate finance fold, governments and financial systems must adjust their approach:
• Update financial frameworks: Adapt green lending guidelines, such as India’s Priority Sector Lending norms, to include climate-aligned MSME finance. Flexible models like pay-as-you-save can ease capital burdens.
• Invest in local intermediaries: Support fintechs, aggregators, and smaller financial institutions building the infrastructure for green credit scoring and simplified sustainability reporting.

A Shift in Perspective

The limited inclusion of MSMEs in climate finance reveals a deeper problem: our financial systems are still not designed for the realities of small-scale entrepreneurship. This is a moment to rethink that design.

Inclusive climate finance—delivered through blended models, simplified credit channels, and strengthened intermediaries—can unlock the potential of millions of entrepreneurs already working in sustainable agriculture, clean energy, and efficient manufacturing.

Empowering MSMEs to decarbonise isn’t a side effort—it’s central to national and global climate success. In India alone, they emit 110 million tonnes of carbon annually. Their transition to green practices is not optional.

This isn’t about giving MSMEs a seat at the climate table. It’s about recognising they are the table: essential to communities, jobs, and the green transition itself.

Let’s stop referring to them as the “missing middle” of climate finance. Let’s start designing financial systems with them at the center—as the engine of inclusive, low-carbon growth.