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GREAT insights Magazine

Green Growth

The Role of the Private Sector

October 2012

Lemma, A. 2012. Green Growth: The Role of the Private Sector. GREAT Insights, Volume 1, Issue 8. October 2012. Maastricht: ECDPM

The question that traditional, public policy focussed development practitioners used to ask was “does the private sector matter for development”? Looking at the data, the answer is an overwhelming yes. 

Just by looking at small-and-medium sized enterprises (SMEs) we can see that they contribute to 50% of jobs and 90% of all enterprises in Africa (1) whilst private sector flows to developing countries dwarf traditional ODA flows, just in 2007 the ratio was 10:1(2) . The question has now shifted to how can the private sector positively contribute to sustainable and long-term development? 

Private incentives

Contrary to popular belief, private sector participation in green growth can often occur spontaneously, rather than requiring a push from government since enterprises are able to assess the cost advantages of implementing green practices within their operations. Companies are engaging in green growth initiatives in order to improve their sustainability, decrease production costs and increase efficiency gains through better (and more sustainable) resource usage or meet international labelling criteria. Even those initiatives that are not specifically (or at least outwardly) aimed at reducing costs or improving security and efficiency, such as initiatives on green corporate social responsibility (CSR) – i.e. the provision of green services within the communities that they work in – are aimed at improving their international branding image and allow companies access to new country markets.

A large number of multinational companies have already set up sustainability guidelines to govern their operations. The standards that they set are often trickled down (or imposed) upon their supplier further down the value chain in developing countries. Such initiatives often result in more stringent environmental standards than those required by the national government in developing countries(3)  but also result in higher costs for suppliers who may be excluded from the supply chain if their requirements are not met. 

Enterprises are also engaging in green growth as a way to increase their production efficiency by decreasing production costs of goods or services i.e. reducing their energy usage or reducing their use of production inputs, which can be a useful triple-win tool since it helps enterprises improve their “green” image, ensure a sustainable supply of inputs (where sustainability practices are introduced within their supply chains) and reduce long-run production and service delivery costs. Enterprises that want to improve their competitiveness will naturally move towards such strategies especially where resources are expected to become scarce (either through a reduction in resources or through increased demand for them) i.e. land, water and energy (4). Such scarcity will however also provide incentives for private enterprises to invest in green growth orientated R&D for improved resource efficiency which could result in decreased emissions and improve natural resource management in the long-term.

Small and poor isn’t beautiful

Whilst information is available on high-income country multinationals and there is also a growing amount of information on middle-income country enterprises implementing such practices, there is little to no information on what initiatives, if any, low-income country based enterprises are actually implementing. In addition, the majority of these reasons for engagement in green growth are more applicable to larger companies such as multinationals or where economies of scale play a large part in the production process. These companies tend to attract the majority of media scrutiny and state attention due to their large-scale operations and global branding image which makes it an imperative for them to undertake green growth initiatives. On the other hand, smaller firms, especially in developing countries, do not have such scrutiny issues and any sustainability initiative that they undertake tends to permeate from larger companies that would require their suppliers to also adhere to the same sustainability practices that they are engaged in. Hence one of the main areas of research that needs to be taken forward is to look at the incentives for low-income country enterprises to spontaneously engage in green growth initiatives, whether the incentives are the same as those that spur high-income country enterprises and how these differ according to the size and scope of developing country companies. 

Synergy with the private sector
Even though forward-looking businesses do have varied incentives to implement green growth practices, these companies often follow their own goals and agenda’s and such initiatives that they enact will be for their own benefit or are often forms of self-promotion rather than tangible and coordinated efforts to ensure long-term sustainability and growth. Hence, in order to build up wider support and uptake for green growth policies within the private sector, other stakeholders such as the government, donors and civil society need to engage with businesses. A fundamental aspect of this is the need for a strong evidence base(5)  on the benefits and costs of moving towards a green growth production system for both the private sector and for government, in order to motivate changes in production and spur the implementation of forward thinking green growth policy. 

Triangulating and fostering engagement between the Private Sector, Civil Society and the Government helps to move green growth process towards a shared area of common interests and objectives and ensure that effectively designed green growth policy can be both an effective way to ensure that policy adoption is successful and at the same time steer private sector responses towards optimal green growth trajectories for individual countries, especially developing countries which have a head start vis-à-vis high income countries in regards to their ability to reorient industry towards greener production processes. 

Alberto Lemma is Research Officer at the Overseas Development Institute (ODI). 

Footnotes:
1. UNIDO (1999) “SMEs in Africa Survive against all Odds”
2. OECD (2008) “Global Development Finance 2008”
3. ODI, ECDPM & GDI/DIE (2012) “European Report on Development 2012 – Confronting Scarcity: Managing Water, Energy and Land for Inclusive and Sustainable Growth”
4. Ibid
5. http://cdkn.org/2012/03/credible-knowledge-base-is-at-the-heart-of-low-emissions-development/ 

This article was published in Great Insights Volume 1, Issue 8 (October 2012)

 

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External authors

Alberto Lemma