By Helle Bank Jorgensen, CEO of Competent Boards
In the business world, the titans grab the headlines and dominate people’s thinking. Walmart, Amazon, Ikea, Unilever, Nike, Microsoft and Samsung are just some of the international giants that bestride the corporate world.
However, like a large iceberg, what goes on beneath the surface could be more important. These large corporations cannot act in isolation: their supply chains are full of and depend on the work of small- or medium-sized enterprises (SMEs). And according to the World Bank’s data, these SMEs more than pull their weight in the global economy, comprising:
● 90% of worldwide businesses
● More than 50% of employment worldwide
● Up to 40% of GDP in emerging economies
● Seven out of every 10 new jobs in emerging economies
In reality, the cogs of business work well by being interconnected and interdependent. As such, SMEs have a huge — but currently understated and undervalued — role to play in the collective corporate effort to address the climate crisis and achieve net zero emissions by 2050 or sooner. It is time to turn the spotlight on the opportunities and
benefits these smaller and medium-sized businesses — and the world at large — would gain from taking meaningful climate action sooner rather than later.
Barriers to change
The links in supply chains are easy to spot. For example, a small company with vehicles for transporting its products will have Scope 1 emissions from those direct operations. However, those same emissions could form part of a much larger company’s Scope 3 emissions from indirect activity. So a simple environmental improvement by a small- or
medium-sized company, such as switching its vehicles to electric power or green hydrogen, could benefit the value chain.
According to the World Trade Organization, large companies derive more than 80 percent of their carbon emissions from supply chains. However, with SMEs making up nine out of every 10 businesses worldwide, their efforts to decarbonize will also have significant impacts on the route to net zero.
Awareness and resources will be the keys to this climate puzzle. A study earlier this year by the SME Climate Hub revealed the pain points in terms of resources and practical help for many smaller businesses. Although more than half (60%) of those surveyed said they had a climate action plan, two-thirds (68%) said that a lack of resources stopped them from taking climate action. Just under half (48%) indicated that a shortage of funds was why they did not address climate change. And although 70% of SMEs need access to external funds to reduce carbon emissions, only one-third have received a financial incentive to do just that.
That is a shame because there are so many opportunities and benefits for SMEs worldwide to reap the rewards of climate action. The International Trade Centre (ITC)’s 2021 SME Competitive Outlook revealed that more than half of smaller African companies had improved the output and quality of their products, opened doors to new markets, cut input costs and enabled better access to green finance by “greening” their products.
Decarbonization efforts can serve up business innovation and efficiency gains for companies of all sizes. The World Economic Forum (WEF) has also highlighted the interconnectedness and climate action opportunities in supply chains in its Net Zero Challenge report. The WEF report concluded that the eight global supply chains that account for more than 50 percent of global emissions could reduce around 40 percent of those emissions via some simple and affordable changes that would not increase costs or reduce efficiency.
It can be challenging for smaller businesses to address climate change, not least in a period of high inflation. These businesses often operate on fine margins, regularly balancing the books to purchase stock or meet the monthly payroll. As a result, many feel they do not have the luxury to dedicate resources to risk management. However, the cost of inaction in such an unstable and fragmented world could be much higher when disaster strikes.
For example, the impact of Hurricane Harvey in 2017 on small businesses in southeast Texas, which scientists estimated was 30% stronger due to climate change, highlighted the dangers of ignoring climate risk for smaller businesses. A report published this year by Harvard Business Review showed that overall the hurricane cost US$125 billion in economic damage, with 90% of businesses losing revenue. Moving towards a circular economy opens another door of opportunity for SMEs. Using longer-lasting, recyclable and renewable materials will reduce costs over time and decrease their vulnerability to any disruptions in the value chain. An International Journal of Production Economics study earlier this year of SMEs in France, Greece, Spain and the UK found that adopting a circular economy model could allow smaller businesses to improve their environmental performance and explore new revenue streams and ideas leading to improved economic performance.
Corporate giants face a tsunami of regulations in the coming years, many of which are related to climate risks and disclosures. Some, in turn, will affect SMEs. In the US, the proposed regulations could require publicly listed companies to disclose information about any material, indirect Scope 3 emissions. So if an SME is part of that
supply chain, they will need to provide information about any greenhouse-gas emissions back up the chain. Smaller businesses can use this moment to get prepared for the changes and build in standard, metrics-based financial and other reporting.
In Europe, the Corporate Sustainability Reporting Directive (CSRD) will make it mandatory for companies that are already subject to the non-financial reporting directive to disclose sustainability information in their sustainability reports from January 1, 2024. However, SMEs have an extra two years’ breathing space until 2026 to comply with
those requirements, with the first reports due in 2027. SMEs should start preparing now for these changes. The Environmental Protection Agency’s Center for Corporate Climate Leadership in the US has a suite of self-assessment tools to help businesses develop meaningful and appropriate targets.
Elsewhere, the United Nations SME Climate Hub provides a target that virtually any small business can adopt: to halve emissions by 2030 and achieve net-zero by 2050, and the ESG Exchange is working to assist SMEs and other businesses with the reporting requirements.
Tips and tricks
● Determine how you can reduce cost and gain efficiency: act as a steward of resources and do not take them for granted; instead, value all your resources
● Consider how resources, formerly known as waste, could unlock new business opportunities: could your waste be a new resource for others?
● Know the environmental risks and goals for your business, your suppliers and your own and your customers: how can you help your customers convert risks into opportunities and reach their goals?
● Ensure you are your suppliers’ preferred customer: a great way to resilience
● Tap into the innovation potential of your proud employees: many SMEs have the agile and entrepreneurial mindset to leapfrog larger customers or competitors
● Understand the climate disclosure requirements for you and your customers: your Scope 1 and 2 emissions are your customers’ Scope 3, so they need to know that they can trust your data.
Helle Bank Jorgensen is the CEO and founder of Competent Boards, offering online ESG and climate programs that draw on the experience of more than 180 renowned board members, business leaders, and investors. Hundreds of directors and senior executives have enrolled in these programs in order to transform their careers and their companies.