By Giuseppe Gramigna, World Bank Senior Consultant and Former U.S. SBA Chief Economist.
This Issues Paper has been developed for the 2021 INSME Annual Meeting “SMEs as Drivers of a Sustainable Recovery” held in Sofia, Bulgaria. Learn more on the event here.
The social and economic impacts of the Covid-19 
The Covid-19 Pandemic, like previous pandemics, caused fundamental structural changes in most economies, or at the very least it accelerated already existing structural dynamics  Thus, issues of success concentration, distribution inefficiencies, and operational weakness became more prevalent and more visible. Thus, the need for sustainable economic development that can withstand the test of time and disruptions became evermore evident.  Many governments first intervened with instruments to provide liquidity to the financial and non-financial sectors of the economy.  As the pandemic continued to persist into 2021, albeit at a declining rate, many governments began to introduce interventions to address long-term structural challenges.  Many Micro, Small and Medium Enterprises (MSMEs) where less able to sustain their operation, simply because of their smallness. In addition, MSMEs that were focused in hard hit sectors, or were less digitized, or less able to adapt to new operational modalities were more adversely impacted than other firms. All of these issues were even more pronounced in emerging and developing economies.
Access to finance is one of the most pressing challenge for MSMEs, and multilateral development financial institutions (DFI) have a significant role in assisting the financing of MSMEs. In this context, state-owned DFIs in emerging markets and developing countries, often with the help of multilateral DFIs, are redesigning their credit offerings to better finance environmentally sustainable MSME economic activities. These new credit offerings are often provided as additions to their traditional financial offerings across the MSMEs spectrum, including young firms, and innovative enterprises. Through these new offerings, DFIs are supporting the building back of a more environmentally sustainable and better digitized MSME sector and economy for the long run.
However, governments and financial institutions are having difficulties creating a sufficiently discrete list of environmentally sustainable economic activities that can be applied for policy targeting purposes. Currently there are several methodologies to create Technical Screening Criteria (TSC) that lead to Taxonomy Frameworks of what constitute environmentally sustainable economic activities. These TSC and frameworks identify and classify economic activities by environmental characteristics and link them to environmental policy objectives. They thus allow for the determination if and how much of an economic activity qualifies as environmentally sustainable. The following is a selected list of TSC and Taxonomy Framework methodologies:
- The European Union (EU) Taxonomy:;
- Climate Bonds Initiative (CBI) Taxonomy:
- International Capital Market Association (ICMA) Green Bond Principles:;
- Loan Market Association (LMA) Green Loan Principles;
- Environmental, Social, and Governance (ESG) goal rating agencies.
These methodologies are based on the Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC).  Some of the high-level details of the Agreement are as follows:
- The Paris Agreement is a legally binding international treaty;
- Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels;
- Implementation of the Paris Agreement requires economic and social transformation that is based on the best available science.
These methodologies are centered on several common principles. Most TSC include, among others, the following principles:
- A TSC must be based on the best available evidence and technology;
- include regional conditions, sectorial characteristics, and temporal dynamics of the climate change process as well as Transitioning phases (e.g., starting period baseline conditions and expected changes over a specified timeframe);
- where possible, be based on quantitative targets and verification processes;
- Where quantitative targets are not available or insufficient to capture the nature of the economic activity, qualitative measures should be used.
An applicable TSC should have additional critical distinctions, among them are:
- Climate change mitigation objectives and strategies to reduce the causes and impacts of climate change;
- Climate change adaptation objectives and strategies for altering economic activities or their modalities to adjust to, and take advantage of, climate changes, including adaptive capacity, strengthening resilience and reducing vulnerability to climate change;
- Adaptation or mitigation by economic activities that are implemented by a specific economic agent or a specific set of economic agents, and directly impact the implementing agent(s). In economic terms this is referred to as Direct Impact; 
- Adaptation or mitigation of economic activities that lead to positive climate change impacts that benefit not only the economic agent(s) that implements a specific qualifying economic activity or activities, but also benefits others, be they other firms, other people or the environment itself. For example, a firm replaces a less efficient energy production unit with a more efficient unit, which reduces the implementing firm’s energy production costs, but also reduces the pollution byproducts released in the environment. In economic terms, the impacts accrued to others are referred to Indirect Impacts and Induced Impacts. The sum of all three impacts (Direct + Indirect + Induced) is the Total Impact resulting from the qualifying economic activity(s). These three notions of impacts are critical for financing qualifying activities, as well as for assessing their environmental, economic, and social impacts over time;
- Transitioning activities that lead to a shift from “brown” to “green” activities;
- Do no significant harm (DNSH) to the environment, healthy ecosystems (including healthy social and economic ecosystems), or to climate mitigation or adaptation efforts.
The Paris Agreement recognizes the need to finance environmentally sustainable economic activities to meet the Agreement’s policy objectives. There are two essential common steps in the process for utilizing a taxonomy to finance environmentally sustainable economic activity(s).
- Use the Technical Screening Criteria to identify eligible economic activities conducted or to be conducted by the firm(s) or financial entity(s);
- Calculate the portion of the qualifying economic activity(s) that qualify with the taxonomy. This is the portion that would qualify for sustainable financing. For Credit Guarantee Schemes (CGS), this calculation can be applied to a specific loan or to a portfolio of loans it wishes to guarantee.
Implementation of a TSC and taxonomy may require the generation and sharing of new, additional data with a well-structured nomenclature and codification. The calculations required by a TSC and taxonomy will need to employ detailed, technical information on the qualifying economic activity(s). Hence, there will be a need for a process to generate, and share technical information for many products, procedures, and services in a consistent and comprehensive manner that is easily and broadly available. This process will most likely entail collaboration across machinery producers, service providers and government entities at the national and multinational level. Thus, assuming the facile availability of consistent and comprehensive information, the firm or group of firms that wishes to implement a qualifying economic activity or set of activities will need to gather and provide this information to financial institutions and possibly regulatory agencies.
In addition, financing of qualifying environmentally sustainable activity(s) will require detailed information on the intended, ex-ante, use of funds, as well as actual, ex-post, use of funds. This data reporting requirement might prove a significant challenge for MSMEs, especially for Micro and Small enterprises, that may be less prepared to gather this information. Thus, there will be a need for subsidized technical assistance for these MSME’s.
More specifically, commercial banks that wish to provide loans for qualifying activities, credit guarantee schemes that wish to guarantee these loans, or governments that wish to regulate or incentivize lending for qualifying economic activities will require information on the intended, or ex-ante, Use of Loaned Funds, also known as intended Use of Loan Proceeds or Use-of-Proceeds. Finally, assessing the ex-post impacts as well as compliance with loan covenants of a specific activity or set of activities will require information on the actual, ex-post, use-of-proceeds.
Lending institutions must gather and retain these use-of-proceeds data at the individual loan level. Then if needed, these loan-level data can be aggregated at the portfolio level. Likewise, credit guarantee schemes must also gather and retain these loan-level data, and if needed then aggregate them at the portfolio level. These loan-level data are necessary for the identification and assessment of (i) credit and environmental risks, (ii) loan compliance, and (iii) the impacts of these loans and underlying qualifying activities.
Thus, different data are to be gathered by different firms, and shared with different financial institutions and different government entities, possibly across the globe. Management of this complex data infrastructure, a Structured Nomenclature and a Structured Code. The Structured Nomenclature will facilitate the identification of a discrete set of (i) qualifying activities, (ii) participating agents (e.g., firms, financial institutions, or regulatory agencies), and (iii) environmental, economic, or social impacts. A Structured Mnemonic Code will facilitate the sharing and analysis of these data across agents and computer systems. For example, a specific economic activity will have a specific name, and a specific Mnemonic Code that identifies (i.e., codes) the activity and its characteristics. Indeed, the structure of the Mnemonic Code will greatly impact the quantity and complexity of the computer coding required to track and analyze these financing, qualifying activities, and impacts.
Most taxonomies define economic activities at the two-digit sector level. For example, the EU Taxonomy uses two principles for categorizing high priority sectors:
- High-emitting sectors based on quantitative data on CO2e emissions, and;
- Enabling sectors Where economic activities in these sectors have the potential to enable substantial Green House Gas emissions reductions in other sectors, and where the life cycle emissions of the activity do not undermine mitigation objectives.
These taxonomies generate lists of qualifying activities that are too broad for policy or investment targets. Thus, there is a need to further specify the taxonomy by interested stakeholders.
Recent reports indicate that the application of the EU Taxonomy has led to classification of “green” financial products such as bonds, and equity funds that do not materially differ from other bonds or equity funds, i.e., the greenwashing of financial products, which in turn causes a dilution of the taxonomy targeting function.  Thus, interested stakeholders will need to collaborate to develop more discrete lists of qualifying activities and qualifying entities that would be eligible for environmentally sustainable financing. Interested stakeholders may include the following:
- Multilateral government groups such as the G20 that can play the leading role in coordinating efforts for fostering members’ coherent financing targets and products for qualifying activities;
- Governments at the national, regional level that will regulate the financing of qualifying activities.
- Multilateral financial organizations such as the World Bank Group, European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB), that could play a critical role in assisting less developed countries develop TSC and Taxonomy, as well as financing targets and products;
- Multilateral research-centric organizations such as the OECD and the ASEAN that can play a critical role in providing much needed applied research;
- MSME financing centric associations that focus on MSME financing such as the European Association of Guarantee Institutions (AECM), the Global Network of Guarantee Institutions (GNGI), the IFC SME Finance Forum, and the Global Partnership Financial Inclusion (GPFI) could play a critical role in establishing the characteristics of environmentally sustainable financial products suitable for MSME financing;
- MSME centric academic institutions such as the International Network for SMEs (INSMEE) and the International Council for Small Business (ICSB) can provide much needed academic research;
- Non-financial sector associations will play a critical role in generating the technical characteristics used to develop TSC at the sectorial, industry, and specific product level.
Required adaptations to the Covid-19 disruptions
Long-term disruptions, like the one resulting from the Covid-19 pandemic, tend to result in meaningful structural economic dislocation and restructuring. As a result, a meaningful portion of private sector economic agents, be they firms or workers, will not return to their pre-disruption economic level or modalities, but will need to adapt new economic modalities, be they new markets or new methods.
In this environment, the critical policy and investment question becomes which agents exited the market? Were they (1) the less efficient, or were they (2) the risk takers? The answer to this question determines the intervention and investment typologies and targeted agents. If the less efficient exited the market, policy makers and financial institutions should work with existing firms and new entrants. Thus, economic recovery and eventually economic growth would primarily occur along existing economic modalities, and with existing agents and new entrants. On the other hand, if risk takers exited the market, policy makers will need to re-grow agents with high-risk preferences, and financial institutions will need to find additional risk takers, as their portfolio may be risk (and thus yield) deficient. In this second scenario, economic growth would occur via new modalities, and predominantly with new agents.
Thus, multilateral and national DFIs are expanding their traditional role of co-financing the provision of technical assistance, finance training, coaching and business advice to help MSMEs increase their competitiveness, resilience, and ability to scale up their productive and distribution capacities.
The COVID-19 pandemic has already resulted in significant structural economic dislocation and restructuring such as historical contraction in per capita income, and long-term damage to potential output and productivity growth.  Thus, government interventions should go beyond financial assistance, and introduce additional interventions to foster adaptations of new economic modalities. The forefront of these interventions should include (i) access to information and networks, (ii) capacity building, and (iii) advocacy. Financial assistance should be part of these three elements. Private sector economic agents (including MSMEs) will need to respond with innovative and forward-looking adaptations, and make resilience planning part of ordinary activities. They will need to be more digital, participate in wider partnerships, and incorporate more diverse input and distribution channels.
A greater creation, retention, and use of high-frequency, highly granular data should be part of future early detection and early intervention of fast-moving behaviors at the local level. It is through these quick local detections and responses that societal-level resilience can be attained, and at lower societal costs. Such data infrastructure will require a parallel infrastructure of laws, rules and technologies that will withstand the test of time and authority; and include laws and regulations on (1) Privacy that outline which data are collected and retained, (2) Confidentiality that outline allowable users and uses, and (3) Security, that outline excluded users and uses of these data. Any effort that gets any one of these three critical elements wrong will fail on its own weight, measured by the quality, quantity, and uses of these data. Finally, a healthy, well-educated labor force, with robust and flexible skills will need to be at the front and center of all these interventions. Governments and private sector firms, and workers will need to share the cost and implementation of life-long training and retraining.
Lessons Learned from the Covid-19 Pandemic
The lessons learned from the Covid-19 Pandemic as well other crisis are expected to be applicable to future disruptions that will require structural changes and adaptations. These disruptions can include phenomena that may occur at the local level but may have broader causes and implications. These may include natural disasters, cyclical economic downturns, and perhaps more importantly environmental deterioration. These lessons learned should also be applicable to addressing social and economic issues such as success concentration, distribution inefficiencies, and operational weakness.
For example, local labor demand and supply incongruities where high unemployment occurs in the face of excess labor supply are often partially caused by incompatible local and national social economic dynamics such as a deficient education framework at the local or national level, or possibly by a lack of labor benefits transportability across local jurisdictions. Often these local labor incongruities engender international human migrations that result in influx of people in a specific community but may be a result of realities in different nations or may reflect broader regional dynamics.
Possible solutions to local labor incongruity may include local collaboration or agreements across a national jurisdiction to ensure a sufficient level of education across the nation, paid at the national level but implemented at the local level. Possible solutions to international human migration may include regional or global agreements, collaboration and co-funding. At the end of the day, some but not all, of the solutions to local labor incongruities can be applied to international human migrations, e.g., universal education at the national level, and international or regional co-funding of local costs for population influxes.
Likewise, local natural disasters such as fires, floods, and temperature extremes may be the result of pollution at the national and global level, but impact local communities. Solutions to these challenges are best applied at the local level but often require collaboration and co-funding at the national, regional or global level.
 This document is partly based on previous work by Giuseppe Gramigna, including “Short-term and long-term economic disruptions and the SME Spectrum – Rebuilding after the COVID-19 pandemic of 2020” STRENGTHENING SMEs IS ESSENTIAL TO ECONOMIC GROWTH, UN ILO Webinar, April 6, 2020, UN ILO Webinar, April 6, 2020, and “Technical Screening Criteria and Taxonomies for Environmentally Sustainable Activities and their Financing – The MSME Dimension”, AECM Virtual Annual Event: 22 – 24 September 2021
 Notable pandemics that caused significant social and economic changes were the 1918 Spanish Flu, Middle Ages Black Death. For further reading see Brainerd Elizabeth and Mark V Siegler, “THE ECONOMIC EFFECTS OF
THE 1918 INFLUENZA EPIDEMIC”, < https://cepr.org/sites/default/files/news/FreeDP_20March.pdf >, downloaded November 24, 2021, and Alfani Guido, “The economic consequences of plague: lessons for the age of Covid-19”, History & Policy, online article < https://www.historyandpolicy.org/policy-papers/papers/the-economic-consequences-of-plague-lessons-for-the-age-of-covid-19 >, downloaded November 24, 2021.
 The term sustainable development varies across nations, government entities, multilateral organizations, the non-profit sector as well as the private sector. The European Union Article 11 encompasses common principles, they include the following objectives: (i)preserving, protecting and improving the quality of the environment (ii) protecting human health (iii) prudent and rational utilization of natural resources, and (iv) promoting measures at the international level to deal with regional or worldwide environmental problems, particularly combating climate change. For further details Official Journal of the European Union, “THE TREATY ON THE FUNCTIONING OF THE EUROPEAN UNION”, TITLE XX, Article 191, < https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12012E/TXT:en:PDF >
 For further details see the OECD, “The territorial impact of COVID-19: Managing the crisis across levels of government”, online document, < https://www.oecd.org/coronavirus/policy-responses/the-territorial-impact-of-covid-19-managing-the-crisis-across-levels-of-government-d3e314e1/#section-d1e3035 >
 The European Commission “Recovery Plan for Europe” and the U.S. Federal Government’s “Build Back Better Framework” proposed by the Executive Branch are two such examples. For further details see < https://ec.europa.eu/info/strategy/recovery-plan-europe_en > and < https://www.whitehouse.gov/build-back-better/ >
 Among the various multilateral organizations that intervened to address the impacts of the Covid-19 pandemic include the World Bank < https://www.worldbank.org/en/who-we-are/news/coronavirus-covid19 >, the European Investment Bank < https://www.eib.org/en/about/initiatives/covid-19-response/index.htm >, and the Asian Development Bank < https://www.adb.org/what-we-do/covid19-coronavirus >
 This list was extracted from “Institutional Banking Group Sustainable & Transition Finance Framework & Taxonomy” June 2020, downloaded August 15, 2021 < https://www.dbs.com/iwov-resources/images/sustainability/responsible-banking/IBG%20Sustainable%20%26%20Transition%20Finance%20Framework_Jun2020.pdf?pid=DBS-Bank-IBG-Sustainable-Transition-Finance-Framework-Taxonomy >
 EU (18 June 2019) Technical Expert Group on Sustainable Finance (TEG) Report on EU Taxonomy. https://ec.europa.eu/info/files/190618-sustainable-finance-teg-report-taxonomy_en . https://ec.europa.eu/info/publications/sustainable-finance-teg-taxonomy_en
 ICMA (June 2018) Green Bond Principles. https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2018/Green-Bond-Principles—June-2018-140618-WEB.pdf
 LMA (11 December 2018) Green Loan Principles. https://www.lma.eu.com/documents-guidelines/documents/category/green–sustainable-finance
 For further details see https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement and PDF document https://unfccc.int/sites/default/files/english_paris_agreement.pdf
 For further details see Input-Output models, < https://en.wikipedia.org/wiki/Input%E2%80%93output_model >
 See Reuters “Fifty shades of green: EU sustainable fund rules muddy the waters”, August 19, 2021< https://www.reuters.com/business/sustainable-business/fifty-shades-green-eu-sustainable-fund-rules-muddy-waters-2021-08-19/ >, downloaded August 17, 2021; and Reuters “EU sustainable investment rules need better corporate data – banking report”, January 26, 2021, < https://www.reuters.com/business/sustainable-business/eu-sustainable-investment-rules-need-better-corporate-data-banking-report-2021-01-26/ >, downloaded August 23, 2021.
 For further details see word Bank, “The Global Economic Outlook During the COVID-19 Pandemic: A Changed World”, Online article < https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world.print >, downloaded November 28, 2021
 Other crisis that generated significant lessons learned were the 1997 Asian Financial Crisis, and the 2007-2008 Financial Crisis.