Research report
Where Next for SMEs and Net Zero?
Jun 2024
Small and medium-sized enterprises (SMEs) play a significant role in global climate action, accounting for 13% of the world’s carbon emissions and consuming 50% of its commercial and industrial energy. With around 400 million SMEs worldwide, they have the power to shape behaviours of individuals, communities, and businesses.
Unfortunately, SMEs have often been neglected in national and regional policymaking, both in developed and developing economies. There has been limited progress in scaling SME climate action, contributing to low levels of engagement.
Numerous commentators, from Machiavelli to Churchill, have argued that major crises can also provide opportunities for positive change.
We argue that today’s ‘poly-crisis’ – multiple intersecting crises, including extreme weather events, the COVID-19 pandemic, increased geopolitical instability, global supply chain disruption and energy price crises – can be the starting-point for more ambitious, transformative policy approaches to accelerate SME decarbonisation.
SMEs are often excluded from energy and decarbonisation policies due to their smaller carbon footprints, heterogeneity, limited resources, and reduced regulatory compliance compared to larger corporations. For example, while the EU’s Energy Efficiency Directive obliges large firms to conduct regular energy audits, SMEs are exempt due to perceived disproportionate cost and administrative burden. However, this exemption also means that SMEs miss out on the opportunities for energy savings associated with regulatory compliance. It is essential to acknowledge the heterogeneity of SMEs by disaggregating firms and sectors based on key variables, such as energy intensity and capacity for carbon emissions mitigation. Understanding the different roles SMEs play as consumers of energy and resources and as influencers within their communities is also crucial.
Conventional climate policies for SMEs primarily focus on their activities as consumers and enablers. Incentives such as grants, subsidised loans, and free audits encourage investment in energy efficiency installations and on-site renewables. SMEs that develop environmental products and services can benefit from research and development funding and tax breaks. However, support programs often remain small-scale, piecemeal, and poorly evaluated. Until recently, policymakers have not fully leveraged SMEs’ roles as influencers for climate action. Initiatives like the UN ‘Race to Zero‘ campaign and the international SME Climate Hub are starting to change this by encouraging SMEs to make public emissions reduction pledges.
Some key SME roles for climate action
The polycrisis has created existential threats to many smaller businesses, and is changing the social contract between business, the state and the wider public. This turbulence is creating new opportunities to engage SMEs on environmental issues, and raise expectations about their responsibilities to act.
To bring about transformational change, there is a need for more flexible and mission-oriented policy arrangements. This requires coordination between public and private sector initiatives, activity across multiple scales, identification and filling of support provision gaps, and investment in SMEs as enablers. Governments need to redefine the conditions for business activity, shifting from market failures to market co-creation and shaping. Additionally, wider strategies must be implemented to redesign markets, set new discursive agendas, and reconfigure existing policy institutions to achieve mission-oriented goals. In the midst of the changing relationship between SMEs and the state, there is an opportunity to re-evaluate policy action across spatial scales and industrial sectors.
In the face of these challenges, it is crucial for the research community to coordinate efforts and provide robust evidence to help different government and non-governmental institutions develop effective approaches to SME decarbonisation. Due to the neglect of SMEs in climate-related policymaking and the interdisciplinary nature of the topic, there is a lack of research evidence regarding governance. The research community must step up to address this gap and place SMEs at the heart of the transition. By collaborating and sharing insights, researchers can contribute to the development of effective policy frameworks that accelerate emissions reduction.
SMEs represent a significant force in global climate action. While they have been overlooked in climate policy discussions, their potential for reducing emissions and promoting sustainable practices is undeniable. Action by both government and non-governmental bodies to shape and steer activity plays a pivotal role in accelerating SME decarbonisation, but it requires a shift in perspective from treating SMEs solely as consumers and enablers to recognising their influence and potential for transformative change. By leveraging the changing context of the social contract, governments can implement tailored arrangements that address the unique needs and challenges faced by SMEs. Collaboration among governments, industry, academia, and the research community is crucial to generating robust evidence and developing effective frameworks for action. By placing SMEs at the centre of the transition to a low-carbon economy, we can unlock their potential as influencers for climate action and achieve meaningful progress towards global climate goals.
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This blog is based on an academic article published in Global Environmental Change, June 2023
A more detailed argument is set out in this article, published in June 2023:
Hampton, S., Blundel, R., Eadson, W., Northall, P. and Sugar, K. (2023) Crisis and opportunity: transforming SME governance for net zero. Global Environmental Change https://doi.org/10.1016/j.gloenvcha.2023.102707