Where Next for SMEs and Net Zero?

Governance for SMEs and Net Zero

Small and Medium-sized Enterprises (SMEs) are pivotal in the global effort to combat climate change. Despite contributing 13% of global carbon emissions and consuming 50% of commercial and industrial energy, SMEs often trail behind larger organisations in their climate action initiatives. This lag is due to exemptions from many energy and climate policies and challenges in accessing relevant, reliable information. The GoZero project delves into the role of SMEs in climate action, identifying emerging trends and setting forth a comprehensive policy and research agenda.

The governance challenge

SMEs are at a critical juncture in their decarbonisation journey. Recent geopolitical events, such as Russia’s invasion of Ukraine, have exacerbated the energy price crisis, placing energy concerns at the forefront of SME agendas. SMEs are particularly vulnerable to energy price fluctuations and supply chain disruptions, which can lead to increased insolvencies and economic instability.

Historically, SMEs have been excluded from stringent energy and climate regulations due to their smaller carbon footprints and limited resources. This exclusion means they often miss out on the benefits of regulatory compliance, such as access to energy-saving initiatives. Local, incentive-based policies have provided some support, but these initiatives are typically small-scale, inconsistently evaluated, and lead to a fragmented support landscape across the UK. Research indicates that the uptake of these support initiatives is low, with less than 1% of SMEs benefiting from support. Common investments include subsidies for LED lighting and solar photovoltaics.

Renewed attention and emerging support

Despite these challenges, there is a growing focus on SMEs and Net Zero from various stakeholders, including government bodies, financial institutions, sector associations, and sustainability consultancies. Initiatives such as the UK Business Climate Hub are working to centralise and simplify support mechanisms for SMEs. However, significant hurdles remain, including the need for broader dissemination of sustainability information, overcoming financial barriers, and ensuring equitable access to support initiatives.

Future directions for SMEs and net zero

Given the energy price crisis, the increasing incidence of extreme weather, and rising public and business concern for climate action, the role of businesses in society is undergoing a fundamental transformation. The GoZero project outlines five key areas for future policy and research focus:

1. Changing role of government: The role of government institutions is set to change, as the private sector plays a growing role in addressing the needs of SMEs for reducing their emissions and environmental impacts. Rather than retreat, the imperative is for governments to adopt the full range of different styles of intervention, in steering, stewarding and scaling activity in support of a rapid and inclusive transition by SMEs.
2. Place-based business support: Effective Net Zero governance for SMEs requires place-based approaches. Seven principles for this include understanding context, increasing ambition, leveraging business clusters, and enhancing local initiatives. Strong networks are crucial for connecting local actors across scales.
3. Entrepreneurship for net zero: Net Zero priorities create opportunities for entrepreneurship and innovation. Four types of entrepreneurship—one-to-many business support platforms, technology-enabled innovators, place-based capacity builders, and place-based eco-innovation catalysts—offer new pathways for SME decarbonisation.
4. SMEs’ multiple roles in climate action: SMEs can influence more than just their own emissions. They can promote low-carbon practices among households and other businesses, adopt innovative models and technologies, and advocate for stronger climate policies. New research is needed to understand how SMEs can effectively fulfil these roles.
5. Just transitions for SMEs: A justice lens is necessary to address SMEs’ role in Net Zero, considering their varied exposure, capabilities, and characteristics. Policies must incorporate geographic and economic contexts to support equitable transitions.

Priorities for action

To support SMEs in the Net Zero transition, the report recommends:

• Faster deployment: Rapidly implement technologies and solutions to reduce SME emissions.
• Broader support: Expand support tools beyond one-to-one advice and grants to reach more SMEs and ensure inclusivity.
• Deeper engagement: Move beyond technology investments to a comprehensive review of business models and practices. Values-based engagements can foster long-term commitments, helping SMEs attract investment and retain staff.

Conclusion

The GoZero project highlights the need for stronger national frameworks and improved resources to address the unique challenges faced by SMEs across different regions. By adopting these recommendations, stakeholders can help SMEs play a crucial role in achieving net zero goals.

For a detailed analysis and comprehensive recommendations, download the full report.

UKERC_Where-Next-for-SMEs-Appendix-1

UKERC_Where-Next-for-SMEs-Appendix-2

Webinar

There will be a webinar based on this study on June 18th. To register for this webinar click here.