At COP 26, over 190 countries pledged to revisit their climate commitments to limit global temperature change to 1.5°C. Considering their share in the corporate ecosystem, SMEs need to be central to the debate.
Small business, big footprint
To date, policy efforts have mostly focussed on curbing emissions by larger businesses, where environmental impacts are often more visible. Where SMEs have been considered, the focus has often been on minimising costs, through exemptions for instance, rather than on accelerating their transition to greener business models. However, while the environmental footprint of individual SMEs may be small, their overall impact is substantial. OECD evidence suggests that SMEs contribute 60-70% of industrial emissions. They also influence broader environmental impacts such as through solid waste. We can no longer afford to look the other way.
The need for change
We can and should be bolder in our ambition for greening SMEs. First, because action delayed is not action avoided. If we are to meet global ambtions for net zero, all SMEs must act to reduce their emissions. It will be much less disruptive to their businesses and their customers if changes are planned and phased over a number of years, rather than just before climate-commitment deadlines.
Second, because there is a business opportunity as well as a cost to greening SMEs. Though policymakers – and SMEs themselves – have long fretted over the burden of meeting environmental standards, evidence is accumulating that green actions can in reality boost business performance.
Greening can clearly save costs: according to the International Energy Agency, improving energy efficiency in SMEs can Iead to cost savings by reducing their energy demand by 10- 30%. Beyond such cost benefits, improved energy efficiency can strengthen small-business resilience by reducing exposure to energy-price volatility and uncertainty, and improve product quality and safety.
Greening can also boost revenue, as environmental credentials increasingly affect business reputation and branding. These credentials drive not only demand from consumers but also from other businesses. As demands on larger firms have increased through the widespread adoption of Environmental, Social, and Governance (ESG) criteria, greening is becoming essential for SMEs to participate in supply chains. Greening can also enhance access to strategic resources such as finance.
Evidence now confirms that SMEs are more likely to grow if they embrace environmental action through changes in production or distribution processes; invest in environmental R&D; switch to renewable energy, or introduce pollution filtering.
Yet many businesses are not aware that green solutions can boost their bottom line. Upfront costs loom large while longer-term savings and revenue potential appear uncertain. This makes the case for better evidence, examples and advice to help them find a path to win-win solutions.
Third, because more ambitious action can and will stimulate increased innovation in environmental solutions, driving down adoption costs and creating new opportunities for new SMEs and entrepreneurs. Already, many SMEs are crowding the market with eco-innovations. In the UK and Finland, SMEs represent more than 90% and 70% of clean-tech companies respectively.
Work in progress
An increasing number of SMEs are already taking environmental action. In Europe, 91% of SMEs are undertaking at least one form of environmental or social sustainability action. This ranges from 61% in recycling or reusing materials, to 52% in reducing energy and the consumption of natural resources. However, there are barriers to meeting our net zero commitments. These include: a lack of information and awareness of the opportunities; costs and benefits; regulatory hurdles and limited access to knowledge networks; as well as access to skills, innovation assets and finance.
Governments can play a key role in tackling these barriers, and have an opportunity to do so through COVID-19 recovery plans. A good example is Korea’s New Deal: National Strategy for a Great Transformation. The Green New Deal will invest 73.4 trillion KRW (61.22 billion USD) by 2025 to support climate action and a greener economy. It includes support for SMEs to develop new green technologies, and provides 215 billion KRW (179 million USD) in public-private joint funds to grow green businesses. It will offer 1.9 trillion KRW (1.58 billion USD) worth of loans for businesses investing in environment-protection tools and facilities.
SMEs vital for net zero
As we raise our ambition on climate action it is time to move SMEs to centre stage, for there will be no net zero without SMEs. They can no longer be exempted from taking environmental action, but they can be supported in taking it. Governments must act quickly to do so – and grasp the opportunities for businesses and the planet.