As sustainability and ESG considerations increasingly shape investor expectations and regulatory frameworks, small and medium enterprises (SMEs) are finding themselves at a crucial crossroads. For many of these businesses, integrating sustainability is no longer just about environmental responsibility, it is becoming a key factor influencing access to capital, investor confidence, and long-term competitiveness.
In this context, Dr. Sanghamitra Bhattacharyya, Professor and Director – Centre of Excellence for Sustainable Development at Great Lakes Institute of Management, Gurgaon, and co-author Manisha Saha examine how ESG alignment is emerging as a strategic advantage for SMEs, particularly those preparing for IPOs. Drawing insights from an exploratory study of SME IPOs, the article highlights how sustainability practices are beginning to influence governance standards, investor perceptions, and post-listing performance in India’s evolving capital market landscape.
India’s climate transition is accelerating. For its SME sector, the question is no longer whether to adopt sustainability—but whether they can afford not to
On Feb 1, 2026, Honourable Finance Minister Smt. Nirmala Sitaraman presented the budget for FY 2026-27. The nation’s net-zero pledges by 2070 and its firm call at COP30 for meaningful climate finance signal a new level of climate ambition and policy direction. Renewable capacity has grown nearly fivefold. The target of sourcing 50% of electricity from non-fossil fuels by 2030 reflects a deeper structural change in development strategy. These signals have been reinforced further in this year’s budget, with the setting up of the SME Growth Fund with ₹10,000 crores, aiming to create future champions by incentivising enterprises. The Self-Reliant India Fund which was set up in 2021 has been topped up with ₹2,000 crore to continue supporting micro enterprises and maintain their access to risk capital.
Investor / SEBI ESG Expectations for SME IPOs
For SMEs, even though full ESG reporting is not mandated, there are certain regulatory expectations that need to be followed. For example, SMEs are required to disclose their material risk, which has been mandated by SEBI. According to SEBI ICDR Regulation 6(2)(H), all material risk factors are required to be disclosed in the Draft Red Herring Prospectus (DRHP). A risk is considered material if the occurrence could adversely affect revenues or qualitatively alter investor perceptions. Apart from traditional material risk, carbon emissions are also considered if the firm is operating in any pollution-heavy industry such as manufacturing. In case of incomplete or boilerplate risk factors, it can trigger SEBI queries or a show-cause notice under ICDR. It is only time before that show-cause comes knocking on your door. Hence, risk factor disclosure is critical. In fact, carbon emission reports are required by any SME if they have:
- Export regulation requirements;
- Are a supplier to any top 1000 company;
- Are a supplier to a company that exports.
Data Insights from SME IPO Study
An exploratory study conducted among 50+ SME IPOs suggests that sustainability did not dramatically change IPO-day valuations. But it strongly influenced internal discipline and post-listing performance. From the study, it emerged that investor demand translated more strongly into post-listing performance for companies that were ESG-aligned. Traditional financial metrics showed negligible impact on the listing gains for the ESG-aligned SMEs, which indicates that investors may be pricing in sustainability and governance quality rather than just relying purely on financial ratios. In contrast, non-ESG companies showed only weak connection between financial metrics and listing performance. Employee ratings showed a negative relationship with the listing gains for non-ESG firms, whereas for ESG-aligned SMEs, it was negligible, which suggests that governance and sustainability credibility may buffer reputational risks.
Potential risks faced by SMEs: some examples
U H Zaveri Ltd., published in May 2018, had received a notice from the Gujarat Pollution Control Board (GPCB) for non-compliance with environmental regulations prior to the listing. They went ahead with the SME publication on the BSE SME platform. In 2026, the CAGR is approximately -10.98%. The issue price of the IPO was Rs. 36 per equity share, while the listing price was Rs. 25.65, showing a listing loss of Rs. -10.35, approximately 28.75% in red. The IPO stock moved from its listing price of Rs. 25.65 to its current price of Rs. 14.63 per equity share, reflecting a change of -42.96% per share.
In the case of Trafiksol ITS Technologies Limited, SEBI cancelled the SME IPO after discovering forged and questionable disclosures in the DRHP. The use of a major portion of the ₹44.87 crore issue was misrepresented in the DRHP and hence raised serious governance and credibility concerns about the legitimacy of the transaction. SEBI intervened and ordered the company to refund investors’ money.
Indian SMEs Implementing ESG Practices
Amid rising regulatory scrutiny and investor focus on sustainability, there are certain SME IPOs launched in 2024-25 that have built their models directly around ESG principles. For example, Namo E-Waste Management Limited, listed in September 2024, is an ISO certified company operating in the e-waste collection and recycling domain and EPR (Extended Producer Responsibility) compliance. It enables producers to meet statutory recycling targets and ensures that disposal of electronic waste is environmentally safe. Apart from operating in the ESG domain, they follow the principles themselves. Similarly, GEM Enviro Management Limited, integrates sustainability into its service offerings. Its operations reflect a structured environmental governance framework that aligns with India’s e-waste management regulations.
Role of large corporates and value chains in supporting SME ESG adoption
Large corporates, especially those in the top 1000 list, have a role to play in aiding ESG adoption for smaller companies. These corporates are required to mandatorily file BRSR reports, that requires data about Scope 1, Scope 2, and Scope 3 carbon emissions. While Scope 1 and Scope 2 arise from the company’s own operations, Scope 3 emissions include
suppliers from the value chain. This means that any SME supplying to these large corporates is increasingly expected to measure and report its own carbon emissions data. Without such
transparency, firms risk losing contracts, export opportunities, and long-term revenue stability.
ESG Starter Roadmap for SMEs
In the current context, getting into a full-fledged BRSR report right now is not the ideal way to go. For SMEs, it is advisable to start slow and build up gradually. A stepwise roadmap may include:
- Begin with ISO certifications -> get environmental compliance audits -> implement workplace safety standards -> maintain basic governance documentation -> gradually start measuring and reporting carbon emissions data.
These are foundational steps that validate sustainability practices, enhance credibility with anchoring clients, and strengthen investor and stakeholder trust.
Conclusion
ESG is no longer an optional narrative for SMEs in this evolving capital market landscape. It is steadily becoming a prerequisite to be credible, competitive, and have a long-term value creation. For small and growing enterprises, instilling sustainability, governance discipline, and transparent disclosures today is not just about compliance but also about securing investor confidence, strengthening client relationships, and future-proofing their growth trajectory.
(This article has been co-authored by Manisha Saha, PGDM 2026 student at Great Lakes Institute of Management, Gurgaon. The authors also acknowledge the support and research assistance of Ms. Avni Sharma, student at Great Lakes Institute of Management, Gurgaon, and the leadership at Onlygood in conducting the study referenced in this article.)
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