Net-zero: Where do Small and Medium Sized Enterprises (SMEs) Stand?
Transitioning to a low carbon economy is essential to reaching the UK’s net zero goal and abating the climate crisis. Small and Medium Sized Enterprises (SMEs), companies which have fewer than 250 employees, make up 99.9% of the UK’s business population, making their cooperation vital. Lloyds Bank conducted research into the progress of SMEs on their ESG journey and perspectives on sustainability challenges. This research combines expert industry and academia insight and the perspectives of SMEs themselves. It included a survey of more than 1,000 SME business leaders, interviews with 10 sustainability experts, 6 focus groups with SME business leaders, and follow-up conversations with individual business leaders.
“SMEs, companies which have fewer than 250 employees, make up 99.9% of the UK’s business population"
What is the current situation?
The research from Lloyd’s Bank shows that while most SMEs see sustainability as important, many SMEs do not know the specific impacts the transition to a net-zero economy will have. The study found that 74% of SMEs were aware of the UK Government’s 2050 net-zero target. A promising 81% of SMEs see sustainability as an important consideration, and 50% have committed to reaching net-zero. However, a considerable proportion of SMEs (40%) did not know how the UK’s net zero target would impact their business. Without this knowledge, it will be exceedingly difficult for SMEs to act appropriately and reap the benefits of ESG. This is shown in Lloyds’ research where it was found that 77% of SMEs either do not have or are unsure of their business strategy to reduce their carbon footprint in the next three years, while just 15% of business owners reported that they knew how to calculate the carbon footprint of their businesses.
Why should SMEs embrace ESG?
Recent developments, including COP26, have brought Environmental, Social and Governance (ESG) issues to the forefront. Previously thought to be an endeavour for the few, ESG is now acknowledged as an important aspect of any business. Climate change will impact all areas of the economy and, by taking action now, businesses are futureproofing themselves against climate risks. Carbon pricing, such as carbon taxes, is set to become more prevalent in the near future. Though such charges will start with larger companies, they will eventually apply to all companies, making it important for smaller companies to adapt to the same standards from early on. With all the talk of climate risk, there has been a tendency for the business opportunities of net-zero to be side-lined. The benefits of ESG are expansive; they include cost savings, waste reduction, employee engagement and attraction, competitive edge, and increased appeal to investors.
What barriers exist?
The challenges of adapting to net-zero will require adaptions. For example, products and services may need to be made less energy intensive, supply chains may need to be re-examined, and reskilling of employees may need to occur. Some industries will require more adaption than others, for example construction, automotive, and transport are predicted to be the most impacted, but all businesses will be affected in some way. When research was conducted into the SME’s own perspectives of ESG, it was found that there are three consistent barriers: finance, control, and assessment. The principal concern amongst SMEs was finance at 39%, which includes concerns like insufficient budget, high cost and low return on investment. Just below this at 36% was control, which includes difficulty in reducing emissions outside of the SMEs own operations. The third barrier, assessment, scored 30% and included the belief that it's hard to measure environmental impact.
ESG offers a virtuous circle of benefits for all aspects of the supply chain. Our soon-to-be-released paper on ESG for SMEs provides a guide for SMEs who are looking to begin or improve their ESG journey.
Sources:
https://www.lloydsbank.com/assets/assets-business-banking/pdfs/from_now_to_net_zero.pdf