ESG—A lifeline for the sustainability of Nigeria’s SMEs

Small and Medium Enterprises (SMEs) are the backbone of Nigeria’s economy. According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), SMEs account for 96 percent of businesses, contribute 48 percent to the nation’s GDP, and employ 84 percent of Nigeria’s workforce. Yet, despite their enormous potential, these businesses face numerous challenges—poor infrastructure, limited access to finance, and market volatility among them. In an increasingly globalised and environmentally conscious world, embracing Environmental, Social, and Governance (ESG) principles could hold the key to their sustainability.

Why ESG matters for Nigerian SMEs

ESG is more than a buzzword. It represents a framework for businesses to balance profit with purpose by addressing environmental risks, social impacts, and ethical governance. For SMEs in Nigeria, integrating ESG practices can open doors to new funding opportunities, improve resilience against climate-related risks, and attract ethically minded customers.

Access to green financing

Globally, investors are increasingly prioritising ESG-compliant businesses. In Nigeria, this shift is evident. According to the Nigerian Exchange Group (NGX), sustainable finance raised through green and sustainability-linked bonds surged to over $1.5 billion between 2019 and 2023. This trend offers SMEs an untapped opportunity to secure affordable financing by embedding ESG principles into their operations.

For example, consider Farmforte, an agribusiness startup that emphasises sustainable farming. By focusing on renewable energy and efficient water usage, Farmforte attracted significant funding from international investors. Similarly, SMEs in other sectors can explore sustainability-linked loans, which often come with lower interest rates for meeting environmental or social impact targets.

Climate adaptation and risk mitigation

Climate change poses a growing threat to Nigeria’s economy, particularly for SMEs. Erratic rainfall patterns, floods, and droughts disrupt supply chains and agricultural productivity. According to the Nigerian Meteorological Agency, flooding alone caused $1.5 billion in losses in 2022, disproportionately affecting small businesses.

Adopting ESG practices can help SMEs mitigate these risks. For instance, incorporating renewable energy solutions like solar panels can reduce dependence on erratic grid power, while efficient waste management can minimise environmental liabilities. SMEs that prioritise climate adaptation are not just safeguarding their future but also contributing to Nigeria’s climate goals under the Paris Agreement.

Enhancing social impact

Social factors are at the heart of Nigeria’s development challenges. High unemployment rates, gender inequality, and inadequate education systems hinder economic progress. SMEs have a unique role to play in addressing these issues.

Take Shecluded, a Nigerian fintech startup dedicated to empowering women entrepreneurs. By providing tailored financial products and mentorship, Shecluded has helped thousands of women scale their businesses. Initiatives like these demonstrate that SMEs can create social impact while remaining profitable. Furthermore, businesses that invest in fair labour practices and community development often enjoy higher employee loyalty and customer trust.

Improving governance and attracting global partnerships

Governance—the “G” in ESG—is critical for building investor confidence. Transparent operations, ethical practices, and sound financial reporting are non-negotiable for SMEs aiming to scale globally.