India’s updated Nationally Determined Contribution (NDC) to cut emissions intensity by 47 per cent below 2005 levels will not be tested in the boardrooms of large corporates alone.
Consider this — India’s Micro, Small and Medium Enterprise (MSME) ecosystem sits at the centre of the country’s economic development. Over 74 million MSMEs collectively contribute more than 30 per cent of India’s GDP. These MSMEs are also responsible for roughly 10-15 per cent of industrial emissions and 25 per cent of industrial energy consumption. With their energy demands expected to increase by 50 per cent by 2030, they become an integral part of any national climate and sustainability strategy.
However, despite their central role, MSMEs receive only a small fraction of green finance flows. The challenge really lies in the absence of financing structures suited to MSME realities. Too many lenders view sustainability-focused investments in and by MSMEs as too risky due to uncertain payback timelines, limited collateral and thin credit histories.
As a result, the sector that represents one of the largest opportunities for industrial decarbonisation and greening of the economy, remains the least served by green finance. A simple but powerful financial innovation such as a corporate-backed green guarantee instrument can help unlock the capital needed for the sustainability transition of MSMEs.
Structural financing
There is a structural advantage that already exists within India’s industrial ecosystem. Large corporates depend heavily on MSME suppliers. These relationships create natural financial linkages that can be leveraged to unlock capital.
Take the example of the automotive sector. Companies such as Tata Motors and Maruti Suzuki rely on extensive networks of suppliers. These OEMs can leverage long-term contracts and payment histories to nudge their suppliers to modernise processes, electrify furnaces and adopt more energy-efficient technologies to remain on approved vendor lists.
A similar dynamic exists in the consumer goods sector. Companies such as Hindustan Unilever and ITC source from hundreds of packaging manufacturers and agri-processing units. Transitioning these suppliers to recycled packaging, solar-powered operations or cleaner processing technologies is essential for meeting their corporate sustainability commitments.
Fleet electrification for e-commerce and quick commerce platforms such as Amazon, Zomato and Blinkit which depend on thousands of small logistics operators and delivery franchises represents yet another opportunity.
In all these cases, large corporates at the top of the pyramid possess three assets that MSMEs lack: fairly strong creditworthiness, detailed operational data on supplier performance, and a direct commercial interest in ensuring suppliers remain competitive and compliant with quality and regulatory requirements.
Green backed guarantee
These supply chain relationships can form the foundation of a new financing instrument — a corporate-backed green MSME guarantee facility.
Under such a structure, a large corporate establishes a small guarantee reserve, covering say, 1-2 per cent of a loan pool, which serves as a first-loss or partial credit guarantee for sustainability loans extended to its suppliers. Banks, NBFCs or development finance institutions can then issue green loans to eligible MSME suppliers, with the proceeds ring-fenced for verified sustainability investments such as rooftop solar installations, energy-efficient machinery upgrades, EV fleet conversions, water recycling systems, effluent treatment plants, and the like. The repayment can be structured against future purchase orders or trade receivables from the anchor corporate, significantly reducing default risk.
There are many interesting ways in which such an instrument can be structured and administered, and aspects of such a scheme are already embedded in the RBI promoted Trade Receivables Discounting System (TReDS).
For instance, a corporate and its banker such as an SBI, HDFC Bank or ICICI Bank could enter into a bilateral arrangement for a supply chain loan facility covering a defined pool of suppliers. Or, the corporate could issue sustainability-linked supply chain bond with interest rates linked to emission reductions across the supplier network. Blended finance structures could also be created, where development finance institutions such as SIDBI or Nabard participate alongside commercial lenders, spreading risk across multiple layers of capital.
Even conservative adoption could unlock substantial capital. Assuming MSMEs require on an average around ₹1.5 crore in sustainability investments, a large corporate with say 500 key suppliers could generate a loan pool of ₹750 crore, requiring up to only ₹15 crore for a guarantee reserve.
Virtuous circle
Such a financing model would create benefits across the ecosystem.
For MSMEs, it would unlock access to affordable long-term capital. For corporates, supporting suppliers in their sustainability transition would improve ESG performance metrics, reduce risk, enhance credibility with global investors and strengthen supply chain resilience. Large corporates, in particular, could burnish their image as socially responsible actors.
Banks and financial institutions would gain access to a new, scalable lending opportunity with significantly reduced credit risk due to corporate guarantees and stable supplier relationships.
India’s MSME sector is not the problem in the sustainability transition. It is the opportunity. Corporate-backed green guarantee instruments can become the bridge between climate ambition and industrial reality — mobilising large pools of capital through a simple, low-risk financial innovation that can be deployed today.
Hariharan is Managing Director; Rajan is Chairperson, ECube Investment Advisors
Published on April 10, 2026