SMEs and Net Zero – challenges and opportunities

...there are around 6 million SMEs in the UK alone, and more than 200 million worldwide employing around 2 billion people.

Given the scale of the Climate Emergency, you might reasonably ask why we’re bothered about small and medium-sized enterprises (SMEs). Surely, they have a fairly minor impact? Shouldn’t we focus all our efforts on the obvious suspects – oil companies, steel manufacturers, airlines, and other ‘big emitters’?

Sounds tempting, but this is not the whole story – in practice, SMEs also have a vital role to play. It’s mainly down to sheer numbers; there are around 6 million SMEs in the UK alone, and more than 200 million worldwide employing around 2 billion people. Almost all businesses are SMEs, and most are ‘small’ or ‘micro’ enterprises with between zero and 10 employees. Each might appear insignificant, but collectively they generate a sizeable proportion of the world’s carbon emissions, plus other environmental problems, such as air and water pollution. SMEs are also important in other ways, including the influence they can have on the environmental behaviours of staff, customers and local communities.

Two people on a motor scooter riding through a flooded urban street at night with illuminated shopfronts

I’ve been researching these complex, varied and often surprising organisations for several decades, during which the business landscape has gone through a series of radical transformations: the privatisations, liberalisation and industrial restructuring of the 1980s; the dot.com boom around the turn of the twenty-first century; the financial crisis of the 2010s; increasingly frequent extreme weather events; and the global COVID-19 pandemic. Many firms failed, while others proved surprisingly resilient. However, we will need more than resilience to get these businesses (and the rest of us) through the Climate Emergency.

So where do we begin? Let’s start with the bad news, then some grounds for optimism and conclude with five practical ways forward.

First, the bad news …

It is extremely difficult to engage smaller businesses, and there are many obstacles to overcome if you want them to make real changes to everyday practices and their longer-term direction. SMEs often (though not always) lack the skills, expertise, time and motivation to reduce their environmental impact. They are also difficult to regulate and it’s not easy to reach them via alternative policy interventions, such as skills training and education.

Given these challenges, you won’t be surprised to discover that policymakers around the world have tended to hold back on environmental initiatives for SMEs, and until recently most of these efforts have been concentrated on their larger, and far more accessible, counterparts. The media often draws attention to a few high-profile examples of business greening but in reality, there is much more to be done.

OK, what’s the good news?

There is plenty to be optimistic about. Firstly, in most cases, we already know what needs to be done to transform smaller businesses and their supply chains. Much of this work is fairly obvious and mundane – insulating buildings, converting to low carbon energy, sourcing, reusing and recycling materials locally. 

There is no need to wait for another wave of high-tech innovation to save us, but we do need to invest substantial amounts in developing the necessary skills and knowledge so that we can implement (existing) technologies successfully.

Secondly, we now have much more effective ways of engaging SMEs, including a number of evidence-based solutions that can be implemented at scale. For example, policymakers often assumed that the only way to promote environmental improvements is to convince owners and managers that there is a ‘win-win’ – their business will be greener and more profitable, whether through cost savings or by being able to increase prices or sales volumes. But this is not the whole story. 

Research that we have conducted at the OU, and evidence from other published studies, indicates that the promise of a quick financial return is unlikely to achieve real, lasting transformations. However, it is possible to get these changes underway if you can make direct connections with their values.

So what do we need to do next?

To conclude, here are four policy priorities, based on a recent review of relevant research findings (Blundel and Hampton, 2021):

1. A much better evidence base – including more detailed data on SME energy use and carbon emissions.
2. Rigorous evaluation of existing models of business support, ranging from local schemes to international initiatives such as the UN’s SME Climate Commitment.
3. More in-depth research on the role and influence of intermediaries, advisors, and support networks in promoting change.
4. A better understanding of the role of personal, professional and organisational values and how they can be mobilised to drive pro-environmental actions.

There is also an urgent need for improved signposting and coordination of information and services, to help SMEs navigate the cluttered landscape of initiatives, guides and projects.

And lastly, despite growing consensus around the need for a just transition, it is not yet clear how the zero-carbon transition can become inclusive and equitable. The SME population is highly diverse, and further research and policy intervention is needed to ensure that businesses owned by ethnic minorities and women, rural-based SMEs and those affected most by COVID-19 do not lose out.

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