15 December 2023

Don’t leave SMEs out of the climate debate

By Mimi Yates

Most decarbonisation efforts, especially the recent COP28, centre around international efforts and large corporations. In the meantime, small and medium enterprises are often neglected by climate policies due to their individual smaller carbon footprints, variable carbon outputs by specialism, lower public visibility, and more limited resources.

Yet this focus overlooks the crucial reality that, in the UK, SMEs make up 99% of businesses, and generate around 40% of non-household greenhouse gas emissions.

There’s good news and bad news here.

The good news is that many SMEs are willing to lower these emissions. In a recent study, over half of the UK’s SMEs consider reducing their environmental impact as a top priority.

The bad news? They can’t without proper financing.

90% of SMEs believe that they face barriers to taking climate action. A survey done at COP28 by the British Chambers of Commerce Insight’s Unit even shows how 40% of companies (mostly SMEs) do not know any details about the UK’s net zero target.

And SMEs are currently disincentivised from prioritising decarbonisation by confusing and unstable government targets and an unhelpful economic landscape. So, unsurprisingly, warm words are not necessarily converted to action – especially when it is financially and operationally difficult to do so. And despite the recent and significant growth in the sustainable finance market, SMEs still face massive barriers in tapping into this pool of funds – whether it’s regulations put in place that prevent banks from making loans to SMEs, or high taxes stopping businesses from being able to invest in capital, which disproportionately affect them.

They are also naturally more risk-averse as they have smaller and less secure balance sheets. Investing in green technology, especially if the return on investment is unclear or not immediate, can just seem nonsensical.

With this in mind, we should lower taxes by offering business rates relief linked to decarbonisation, or enhance capital allowances for direct investment in greener efforts specifically for SMEs.

And we could encourage eco-labelling on products, where the consumer knows how much carbon it took for the item to end up on their doorstep, much like ingredients lists on foods. This would, in turn, encourage SMEs to be more carbon efficient. Consumers put their money where their mouth is, with a quarter of consumers willing to pay more for more sustainable products according to a recent Deloitte survey, we can see a clear demand for SMEs to respond to.

Moreover the government must provide stable policies on climate targets to provide certainty to SMEs. Policy instability has been one of the biggest bug-bears of business and SMEs are no different.

The knowledge gap also persists. Sustainable finance often comes with complex application processes and stringent criteria that can be challenging for SMEs. These may include detailed environmental impact assessments, sustainability reporting requirements, and specific targets. SMEs often lack the specialised knowledge and resources to navigate this, finding it difficult to comply. Incentives must be coupled with advisory services, simplification of the arbitrary parts of assessments, and better access to information that can help them implement sustainable practices more effectively.

SMEs are important drivers in innovations for greener developments, and so boosting their productivity is paramount. Innovation policies are key for green start-ups and scale-ups, while upskilling and business support services will encourage the development of green technologies that could bridge the current market and knowledge gap.

All in all, the outcomes of COP28 must not overlook the backbone of the British economy in the fight against climate change. We must level the playing field for SMEs in the race to a greener future. After all, decarbonising our world is everyone’s business.

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Mimi Yates is Director of Engagement and Operations.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.