COP 28: Why understanding how SMEs transition to net zero is pivotal for a faster transition

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A man commutes on a rented Santander city bike in London.

By Dr Roshan Boojihawon & Dr Carole Couper
Department of Strategy and International Business

SMEs are the backbone of the UK economy, and the same is true for many economies globally. Their operations and supply chain activities contribute significantly to greenhouse gas emissions. The British Business Bank conducted a survey suggesting that 43% – 53% of UK Business emissions come from companies with less than 249 employees. This accounts for up to 36% of total UK emissions.

However, data is only available for Scope 1 and 2. Scope 1 refers to direct emissions from a company’s assets and Scope 2 encompasses indirect emissions from purchased energy generated offsite. Scope 3 accounts for indirect emissions across a company’s upstream and downstream supply chain activities, for example all the emissions indirectly generated by a business: business travel, employee commutes, waste, purchased goods and services, end-of-life disposal of products, transportation, distribution, and more. These are the hardest to track and quantify, yet they can represent 90% of a company’s carbon footprint. Significant emissions data is lacking, particularly around Scope 3 for SMEs, making it difficult for full-scale assessments of their carbon emissions to be attributed.

With recent calls to rapidly scale and speed up decarbonisation efforts among SMEs to help achieve national net-zero targets, we need a better understanding of how and why SMEs can accurately measure and report on Scope 3 or effectively adapt their businesses around its impact and what that adaptation process may look like. Rushed and blanket approaches to help SMEs towards decarbonisation may be ineffective until we better understand SMEs’ journeys to net zero. SMEs can be very influential in achieving UK net zero targets, but more attention should be paid to their distinct needs and the development of tailored support to help their transition faster and more effectively.

Although SMEs have been mostly overlooked in global climate policymaking, this year, COP28 is championing an inclusive agenda promoting the need for businesses of all sizes to join and accelerate their efforts towards decarbonisation. COP28 is partnering with SME Climate Hub to develop and propose more proactive access to free tools and resources, allowing SMEs to implement emissions reduction strategies across their businesses. Whilst this is commendable, research in the UK led by the FSB (Federation of Small Businesses) shows that SMEs face an “uneven and fragmented” net zero support landscape and that such support does not achieve the desired effects as they fail to reach the majority of SMEs.

Our research has noted that whilst getting started might be an initial hurdle, having an approach that understands and tallies the unique needs and current pressures of SMEs might work to support them better. A recent SME policy support analysis shows that an enhanced and much more joined-up regional policy and support framework that works better with the different needs of SMEs in different sectors is needed. Our research shows that such support should look beyond the common net zero challenges that small businesses face in terms of upfront financing, and time and knowledge constraints, and acknowledge the importance of SMEs’ strategic priorities. The value that the transition to net zero can add to SMEs’ business models should be considered alongside the costs generated by the decarbonisation of their businesses.

As the sustainability of entire supply chains comes under greater scrutiny, that pressure will only intensify on firms, including SMEs. Scope 3 challenges are addressed in coordination and collaboration with supply chain partners, which adds further complexity to measuring and reporting emissions for SMEs. SMEs are increasingly expected to adjust or conform to their business partners’ decarbonisation demands or risks within supply chains. They are also expected to evidence and share relevant ESG information as the smaller suppliers to the larger suppliers in the global supply chain.

Research at the University of Birmingham is starting to gather evidence on the unique experiences of SMEs in transitioning to net zero. Our workshops are pulling this evidence together with SME owners and sustainability professionals uncovering some of the granular internal debates, decisions, and realities of organisational transitions to net zero in SMEs to highlight the following insights:

  • To start tackling SMEs’ Scope 3 emissions, it is necessary to demystify and simplify the reporting process to understand more clearly how carbonisation is built into the Scope 3 emissions (including CO2 and other CO2 equivalents) across business activities.
  • For the SME, determining its strategic posture within its supply chain and within its net zero transition needs continuous thought and work. This is essential to make better business sense of the transition process and the commercial and non-commercial value it can generate within current business models.
  • It is important that a net zero transition travels effectively through an organisation’s running tiers of leadership, structure and culture for it to work.
  • Accounting for Scope 3 is not as complex as SMEs may initially think (check out the E-Liability Institute and the Smart Carbon calculator). Indeed, important progress is being made to help SMEs map and report their Scope 1, 2 and 3 emissions effectively; however, engagement with sustainability may involve a steep learning process, and ‘baby steps’ towards a more comprehensive and accurate assessment over time is advised.
  • Net zero or business survival need not be a choice for SMEs in their net zero transitions. There are ways to achieve better strategic alignment through the power of collaboration in net zero transitions within and across their supply chains, which can be resolved through effective dialogue and understanding.

COP 28 represents an important and timely opportunity to spotlight SMEs’ role and significance in contributing to global decarbonisation and recognising that net zero is impossible without SMEs. The COP’s SME Support Hub is a starting point; yes, financing is key, but much research is needed to understand the appropriate transition pathways that fit and work with the unique contexts of SMEs for faster transition. COP 28 can set the tone for how this happens globally.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.

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