Net Zero: Are SMEs The Missing Link In The Chain?

A growing number of businesses are adopting ground-breaking targets to reach net zero carbon —with some going beyond to become carbon negative. But what about those who are struggling to see a path to 2025, let alone 2050?

The zero-carbon headlines may have been dominated by some of our biggest brands, but in reality, they represent a fraction of the world’s business ecosystems. According to the World Bank, as many as 90% of all businesses are small and medium-sized enterprises (SMEs) — commonly defined as those with up to 250 employees.

In a recent article, we looked at the imperatives for the business sector to embrace decarbonization, not simply in terms of meeting societal obligations but also for long-term benefit. However, not all businesses are created equal. Is there the same incentive for businesses whose revenues are counted in thousands rather than billions? Or, more importantly, when the impact of COVID-19 is leaving many SMEs struggling simply to survive? As Guido Lena, sustainability director for Europe-wide business association SMEunited, puts it: “It is challenging for companies in the red to be green.”

These are unprecedentedly tough trading conditions, but the net zero challenge remains as urgent as ever. So, what can be done to bring this vast and vital segment of the global economy on board?

The Organization for Economic Co-operation and Development estimates that SMEs represent 99% of all firms across its 37 country members, and declares such businesses to be central to the “green transformation”. To date, however, little consideration has been given to their carbon footprints. In terms of overall emissions, smaller businesses have focused their efforts on air quality and waste and water management, areas that tend to be in the sights of environmental health officers or health and safety executives. Broader sustainability concepts, including carbon reduction, are given less priority — borne out by the fact that just 12% of sustainability reports submitted to the Global Reporting Initiative’s Sustainability Disclosure Database are by SMEs.

Something clearly has to change. As yet, only a handful of countries have introduced carbon taxes, but mandatory energy and carbon reporting, currently targeting the largest emitters, is becoming more widespread. And with governments worldwide now committing to net zero, it is inevitable that the thresholds for such mechanisms will be progressively lowered.

“Typically, from a climate perspective, we look at where the most material impact lies: who has the biggest greenhouse gas (GHG) emissions? And the answer, with sectoral variations, is generally the largest companies. However, given that net zero inherently involves the whole value chain of any business, including its supply chains, we're going to see increased scrutiny on medium-sized enterprises and eventually the smallest ones,” says Kealy Herman, a project director on WSP’s sustainability, energy and climate change team in the US.

It’s a reality that’s acknowledged by Lena at SMEunited, which represents 24 million SMEs in Europe employing 95 million people. But he also stresses that top-down strategies could jeopardize smaller businesses if they don’t reflect and adapt to local realities. “The challenge is to assist them to adopt new business models which are more energy efficient and/or focused on the circular economy, while safeguarding their long-term prospects, providing sustainable growth and employment. This should happen at local level but within a European and national framework, otherwise there’s a real risk that many of these traditional companies may disappear.”

The difficulties facing SMEs vary across activity, sector and geography. But there are some common obstacles, explains Herman. Focused on the day-to-day challenges of running a business, SME owners may simply lack awareness of what’s at stake and how it applies to them. Others may not have the in-house sustainability expertise, time or resources to tackle their carbon footprint. While many carbon-reduction programs can generate cost savings in a relatively short timeframe, upfront investments are required. It’s not surprising that a lack of time and money was the number one barrier for SMEs responding to a survey by the UK’s Carbon Trust.

And then, of course, there is the impact of COVID-19. “For many SMEs, the sole focus now more than ever is on winning work and delivering contracts,” says Seng Chuan Tan, treasurer and executive board member of the World Federation of Engineering Organizations (WFEO), which works actively with SMEs, particularly in developing regions. “Few have the skillsets or the human and financial resources to dedicate to the carbon-reduction agenda. And the current pandemic has only exacerbated the situation.”

Tan, himself the shareholder of a Singapore-based SME, adds that it’s still crucial for smaller businesses to review their operations from a carbon perspective. “It’s paramount that SME owners/managers have an appreciation of sustainability principles, look for the opportunities to cut their CO2 emissions within their operating processes and implement carbon targets.”

In Tan’s view, leaving this to a voluntary approach will take too long. Instead, governments will need to establish regulatory frameworks in conjunction with SME-targeted initiatives and incentives — a combined carrot and stick. “Once they understand the benefits of decarbonizing and see the results in their operations, naturally they will embrace it.”

But some SMEs aren’t waiting for the legislative “stick” and can already see the business benefits. Emily Wasley, practice leader of WSP’s corporate climate risk and resilience practice in San Francisco, says her team is working with growing numbers of SMEs keen to examine their carbon footprints, irrespective of current or future regulations.

“The enthusiasm felt by individual SMEs for the green transition depends on the type of business and their activities. But certainly, for higher emitting SMEs, the cost savings or commercial returns from investing in energy-efficiency initiatives can be attractive, and the initial outlay recouped relatively quickly.”

Wasley adds that many of the wider benefits of carbon reduction are as applicable to SMEs as to larger competitors. Diversifying your energy portfolio and energy sources to include renewables can provide resilience and security, in case the traditional grid system fails. Renewables are also cleaner, which brings health benefits for your staff and your immediate environment.

And for SMEs there’s another fundamental incentive, says Wasley: “their position within the supply chains of bigger players, which are already implementing carbon targets”. With larger companies increasingly required to report on indirect emissions from their value chain (known as Scope 3 emissions under the internationally recognized accounting tool, the Greenhouse Gas Protocol), their suppliers will need a clear understanding of their own emissions.

WFEO’s Tan echoes this point, citing the palm oil industry as an example of how entire supply chains within the food sector have had to adapt to stringent No-deforestation, No-peat and No-exploitation (NDPE) sustainability policies launched a decade ago. Confectioner Mars, which introduced its Palm Positive Plan in 2019, recently announced it has dropped all palm oil suppliers that don’t commit to preventing deforestation. Tan is confident that carbon targets will steer supplier decision-making across other sectors in a similar way.

A new initiative by several multinationals further reinforces this argument. 1.5°C Supply Chain Leaders was founded by Ericsson, Ikea, Telia, BT and Unilever with the aim of halving absolute GHG emissions before 2030 and reaching net zero emissions throughout their supply chains before 2050. The group is supporting a newly launched SME Climate Hub, described as “a one-stop-shop for SMEs to curb carbon emissions, build business resilience and gain a competitive advantage”.

Meanwhile, the supply chain of Apple is also under pressure to convert to clean power, as the tech giant targets carbon neutrality across its entire business, including its manufacturing suppliers, by 2030. It has so far secured commitments from more than 70 companies to use 100% renewable energy for the production of its devices.

Another player focusing on its supply chain is Dutch-headquartered Signify (formerly Philips Lighting). With global revenues of €6bn, Signify has already achieved carbon neutrality across its own operations, and is now targeting its “extensive chain of suppliers of varying size and scale, spread worldwide”, according to João Pola, chief executive for UK and Ireland. “If we want to be a sustainable company, and make the world more sustainable, our supply chain must be sustainable too. We work with our suppliers because, from an operational perspective, there is a mutual benefit: the more efficient our suppliers are, the more efficient we will be.” Signify introduced its Sustainable Supplier Program in 2017, which assesses suppliers individually, recognizing that not every business in every region can address sustainability in the same way.

SMEunited’s Lena applauds this collaborative approach. “It’s no good if a big company presents its suppliers with a 400-page sustainability manual and tells them, ‘you’re either in or you’re out’. That’s just not going to work for a company with ten staff.”

So, in practical terms, what should an SME be considering?

For Wasley, the first step is to assess your emissions through a GHG inventory or energy audit. “The findings will help you to quantify emissions, set a baseline, and highlight areas with the biggest potential for reductions.” It may seem daunting, she warns, but there are resources available to SMEs to overcome information barriers.

A good starting point is the GHG Protocol, which hosts accounting tools applicable to a range of businesses, in addition to country-specific and sector-specific tools. The US Environmental Protection Agency’s Center for Corporate Climate Leadership Simplified GHG Emissions Calculator is a simplified calculation tool to help small businesses and low-emitter organizations, regardless of their location, to estimate and inventory annual emissions. Herman also suggests contacting higher education institutions, where many professors want their students to have real-world case studies. “You could get an intern or a student to conduct a basic energy audit or make a sustainable business plan for your business.”

… then look for the efficiencies

Armed with the facts, look for efficiencies by reducing consumption, switching to low-energy or renewable products and cutting waste. Having implemented reduction measures, you can start thinking about electric vehicles and switching to renewable energy, whether through green tariffs from your utility or on site — for example, by installing solar panels.

Wasley advises pragmatism: “Start with the low-hanging fruit: look at the more direct Scope 1 and Scope 2 emissions to begin with, which don't take a lot of time or resources. Don’t aim for major changes immediately because unless you’re prepared to rebuild your entire company, it won’t be realistic. It’s crucial to set targets that are both achievable and ambitious. Many of our carbon-reduction efforts are focused on 2050 but that’s a long way off; set a ten-year target, measure your progress and adapt your plan as you go.”

It is also useful to benchmark your efforts and the efficiencies you are seeking to make against your peers. Another resource from the Center for Corporate Climate Leadership that Wasley recommends is the GHG Inventorying and Target Setting Self-Assessment, a technical tool that allows companies to evaluate their approach, as well as offering useful insights into what other companies are doing.

If you are part of a supply chain, and your customer has requested information, don’t be afraid to ask them for help, adds Herman, because they may have resources in place to help collect that data. “Much of our work is supporting clients to track their emissions, and those of their suppliers. I have advised many SMEs on how to calculate their GHG emissions because ultimately they don’t want to risk losing a customer.”

But it shouldn’t just be about fear of losing business. Sustainability and profitability can, and should, be good partners, says Herman. “We spend so much time talking about the risks of climate change, which are actually concentrated on bigger businesses. But if we look at the opportunities around transitioning to a low-carbon economy, it’s a level playing field for small and big alike.”

“Adding low-carbon products or services could strengthen your position with your clients and boost sales. And, if big businesses can provide mentorship to SMEs, that can only help the whole economy while giving them access to suppliers providing low-carbon products.”

In many ways, without the scale or complexity of larger companies, SMEs are at an advantage. They can pivot faster, and implement carbon-reduction measures more quickly and cheaply.

Globally, the economic impact of COVID-19 will be felt for years, and SMEs have been hit far harder than larger businesses. The crisis has also underlined the fragility of some of our core supply chains. It is sobering to think that the wider societal crisis triggered by climate change will far outweigh that of the current pandemic. That in itself is a powerful incentive for all firms, not least SMEs, to take action.