by Greg Lathan
The headlines surrounding zero carbon emissions have been dominated by some of our largest brands, with the majority of recent progress coming from global corporations looking to reduce CO2 emissions and improve energy efficiency. Much of the initial emission reduction progress by large businesses is due to pressure they are facing from their shareholders and the general public. As a result, the majority of the support, guidelines and incentives available for the development of sustainable programs and for reporting emissions reduction, have been developed for large companies and do not cater to small and medium enterprises (SMEs). According to the International Labor Organization, SMEs (companies with less than 500 employees) represent 90% of all firms globally and comprise roughly 70% of worldwide employment, driving nearly 70% of global gross domestic product (GDP).
Given their contribution to global GDP, it is no surprise that SMEs constitute the majority of supply chain emissions to large corporations. Since corporate supply chain emissions are 11.4 times higher than their operation based CO2 releases, transition to a low carbon economy must incorporate SMEs. The net zero carbon emissions of these large corporations encompass their entire value chain, with the vast majority arising from their own supply chain, therefore there will be increased scrutiny on the SMEs who contribute to making their product. If not, SMEs will face competitive disadvantages as they strive to support larger corporation emission reduction goals.
Given their CO2 contribution from a supply chain perspective, SMEs are increasingly requested by large corporations to reduce their CO2 emissions and report their progress to demonstrate they are meeting their targets. In addition to pressure from their larger corporate clients (who must publicly demonstrate the progress of their sustainability initiatives to shareholders/customers), the Securities and Exchange Commission (SEC) is also pushing banks to scrutinize sustainability progress among large corporations who seek business financing. It is estimated that 70% of external funding for SMEs originate from bank loans in the developed world. As financial institutions seek to reduce their portfolio emissions, they will push SMEs to provide environmental data to make lending decisions based on sustainability progress.
A recent World Forum report highlighting SMEs showed they fall short of large corporations in regard to their incorporation of sustainability within their business practices. Although 69% of SME CEOs have included sustainability in their mission statement, only 51% have integrated sustainability considerations into their overall business strategy, with only 21% of SMEs tying executive compensation to their company’s performance in meeting sustainability goals/objectives!
However, SMEs are beginning to make progress. A new survey by the SME Climate Hub reveals half of small/medium business calculate emissions, with 60% of SMEs having plans to reduce carbon impact. Embracing sustainability and taking climate action leads to more resilient businesses and indications are that SMEs are beginning to understand these benefits. Small businesses are prioritizing climate action to enhance brand (73%), differentiate their companies from the competitors (61%), meet customer expectations (42%), with an overwhelming majority (96%) simply citing that reduction of CO2 emissions is simply “the right thing to do.” However, 63% SME owners still are concerned that they do not have the proper skills and knowledge to tackle the climate crisis. This may include education – where and how to get started, a baseline understanding of the SME role in climate or the tools available to help them in their journey. Other top reasons for delaying efforts to reduce CO2 releases include lack of funding (48%), not enough time (40%) and other more important priorities facing SMEs (42%).
Since significant competitive disadvantages face SMEs if they are not involved in opportunities to embrace sustainability and lower carbon emissions, it is imperative that less visible SMEs began preparing for this challenge. This challenge is exacerbated by the major obstacles SMEs have faced over their larger clients – they are largely represented in business sectors that were most affected by the COVID Pandemic, due to smaller available cash, have less overall depth/capabilities, limited supply chain and lower access to technologies which drive efficiency. The obstacles confronting SMEs to document and demonstrate progress in sustainable business operations must be overcome if a goal of limiting global temperature increase to 1.5 degrees C.
Next: Helping SMEs Get Started Taking Climate Action.
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