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Embracing Sustainability: Actions for SMEs

Introduction

Who is this guidance for?

This guidance is for those who own or work in Small and Medium-sized Enterprises (SMEs), and for those small and medium-sized practitioners who advise them. We have heard a lot about sustainability and climate change in recent years, but how do these issues relate to running a small business in difficult times, and how familiar are you with what they mean in practice? The aim of this guidance is to help you – as an SME owner, employee or advisor – to see how you can embed sustainability in your business and understand its benefits.

Sustainable development: The ability to satisfy the needs of the present generation without adversely affecting the conditions for future generations.1

Climate change: Climate change refers to a change in the state of the climate that can be identified (eg by using statistical tests) by changes in the mean and/or the variability of its properties and that persists for an extended period, typically decades or longer.2

Why is this important?

The active involvement of SMEs in response to the environmental and social challenges we are currently facing is crucial if national policy goals of sustainable development are to be achieved.

In most countries, the majority of businesses are SMEs which contribute to the creation of jobs and overall economic wellbeing. They represent about 90% of businesses and more than 50% of employment worldwide.3 SMEs, by virtue of their prevalence and collective economic importance, are every bit as relevant to the issue of sustainable development as larger organizations. SMEs account for an estimated 70%4 of industrial pollution in Europe and produce 29.7 million tCO2 of emissions across Southeast Asia annually.5 Governments are establishing ambitious targets and policies to reduce greenhouse gas (GHG) emissions and achieve more sustainable economies that are less reliant on fossil fuels. The SME sector is appreciated as key to making real progress in this area.

Sustainability issues are already affecting SMEs. As an SME, if you do business with large companies or public bodies, you are part of an extended supply chain. As a result, you may be expected to follow prescribed procedures and practices in a number of areas, including sustainability. Raising finance may be dependent upon addressing conditions laid down by the lender regarding sustainability issues. Further, there may be opportunities for you as a business to help tackle a range of social and environmental issues.

Research suggests that there is real potential for SMEs to expand their activities in the area of sustainable business and benefit the wider economy. Research by E.ON in 2020 found that the pandemic had caused a big shift in consumer behaviour – more than one third (36%) of UK citizens surveyed stated they were buying products from companies with strong environmental credentials, and 80% said they were planning to purchase goods and services from businesses that they knew had made a concerted effort to be “environmentally friendly”.6

In the current challenging economic environment, finding ways to reduce use of energy and other resources will deliver both essential financial and environmental savings.


What does this guidance aim to do?


This guidance aims to introduce the sustainability agenda to those SME owners, employees and advisors who want a deeper understanding of how it relates to their businesses and how they might seize short- and long-term opportunities from this agenda. This guidance focuses on SMEs and the specific issue of climate change and also shows how support can be provided to SMEs from professional accountants and other external experts. Further resources are identified where more detailed information can be found for any of these issues.

Opportunities for SMEs

Increasing numbers of stakeholders are seeking more sustainable lifestyles and are selecting products or business practices that are more environmentally conscious and sustainable.7 Customers, employees and local communities are now pursuing higher standards and commitments to sustainability from all businesses, including those in the SME sector.

If your SME does business with larger companies and public bodies – or aims to – you will likely find you are expected to demonstrate the steps you are taking to incorporate sustainability measures into your business practices. This is typically formally assessed during the procurement process. Such commitments may also be sought in the process of raising finance and accessing loans.

SMEs may not have the economies of scale experienced by larger businesses, but they have the advantage of being agile and responsive to changing consumer trends, market demands and regulations that dictate changes to business practices. This agility is especially useful in areas such as branding, marketing and product development. The planning and implementation of sustainable business practices presents an opportunity for smaller businesses to reposition themselves creatively within this changing business landscape – a challenge that larger businesses may find more difficult to manage.

Embedding sustainability into your core business practices can add value in many ways, such as through:

  • Enhancing your opportunities to conduct business with the increasing number of companies and public bodies that are either required by law to comply with specified standards of sustainability management or have chosen to adopt them.
  • Saving on outgoings by focusing on how to improve resource efficiencies in your operations and production processes.
  • Gaining a competitive advantage by attracting customers who appreciate businesses with environmentally and socially responsible practices.
  • Involving your employees in decisions about how to become more sustainable as a business, which in turn boosts morale and improves job satisfaction.
  • Preparing for regulatory changes that may impact SMEs.
  • Accessing sources of finance only available to businesses with sustainable practices.

The impetus to integrate sustainability throughout your business model can come from a number of sources that are further explored in the following sections.

CONCLUSION

Governments are now committing to changing how the world does business in order to address social and environmental issues. Consumers are increasingly demanding these revisions. Businesses of all sizes need to be aware of the laws and regulations that are progressively reflecting this new direction. While many regulations are directed towards large businesses and those consuming high energy, SMEs will still be affected by this movement. SMEs are an enormous component of the global economy, and their engagement with the changes is seen as crucial if governments are to succeed in their aims.

SMEs that want to do business with large companies and public bodies need to be aware of the obligations that those organizations now have, as they could result in conditions being imposed on their suppliers. SMEs also need to be aware that some larger companies are now choosing to impose their own value conditions on businesses that wish to work with them. Therefore, the SMEs that are part of supply chains need to be prepared to make necessary changes to their practices that will enable them to retain their customers.

In order to encourage the business community to adapt to new and sustainable ways of working, governments and banks are now offering new streams of financial support to SMEs that involve committing to social and environmental improvements. Businesses – including SMEs – that are prepared to address these issues in their working practices are more likely to gain access to potential new sources of finance.

Professional accountants have always played key roles in helping SMEs to achieve profitability, expand and grow, and they are equipped to help their clients cope with the challenges presented by regulatory changes of all kinds. They can help their clients deal with many of the specific measures inherent in the sustainability agenda. As well as helping to manage compliance, professional accountants working in the SME sector are always particularly alert to market conditions and are in a perfect position to advise their clients on how to take advantage of the opportunities of the sustainability agenda.

Glossary

CLIMATE CHANGE

Climate change refers to a change in the state of the climate that can be identified (eg by using statistical tests) by changes in the mean and/or the variability of its properties and that persists for an extended period, typically decades or longer.

 

ESG

Environmental, Social and Governance. Investors are increasingly applying these factors as part of their analysis process to identify material risks and growth opportunities. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report

Defined by the CFA Institute.

 

GHG PROTOCOL: SCOPES 1, 2 AND 3

Scope 1: Emissions from operations that are owned or controlled by the reporting company.

Scope 2: Emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the reporting company.

Scope 3: All indirect emissions (not included in scope 2 that occur in the value chain of the reporting company, including both upstream and downstream emissions.

 

GREENHOUSE GAS EMISSIONS

Greenhouse gases are gases in the atmosphere such as water vapour, carbon dioxide, methane and nitrous oxide that can absorb infrared radiation, trapping heat in the atmosphere. This greenhouse effect means that emissions of greenhouse gases due to human activity cause global warming.

 

NET ZERO

Net zero is:

  • Reducing scope 1, 2, and 3 emissions to zero or to a residual level that is consistent with reaching net-zero emissions at the global or sector level in eligible 1.5°C-aligned pathways
  • Neutralizing any residual emissions at the net-zero target year and any GHG emissions released into the atmosphere thereafter.

 

PHYSICAL RISKS

Economic costs and financial losses resulting from the increasing severity and frequency of:

  • Extreme climate change-related weather events (or extreme weather events) such as heatwaves, landslides, floods, wildfires and storms (ie acute physical risks);
  • Longer-term, gradual shifts of the climate, such as changes in precipitation, extreme weather variability, ocean acidification, and rising sea levels and average temperatures (ie chronic physical risks or chronic risks); and
  • Indirect effects of climate change, such as loss of ecosystem services (eg desertification, water shortage, degradation of soil quality or marine ecology).

 

SME

The EU wide definition states an SME is any organization that has fewer than 250 employees and a turnover of less than €50 million, or a balance sheet total less than €43 million.

 

SOURCES OF GHG

The UN’s Climate Action states that fossil fuels – coal, oil and gas – are by far the largest contributor to global climate change, accounting for over 75% of global GHG emissions and nearly 90% of all carbon dioxide emissions. They list sources of GHG emissions here:

 

SUSTAINABILITY

The ability to satisfy the needs of the present generation without adversely affecting the conditions for future generations.

 

SUSTAINABLE BUSINESS

A business that delivers financial returns in the short and long term in a way that generates positive value for society and the environment, operates within environmental constraints and contributes to the ongoing resilience of social and environmental systems.

 

SUSTAINABLE DEVELOPMENT

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

 

TCFD

The Task Force on Climate-Related Financial Disclosures (TCFD) recommendations are widely adoptable and applicable to organizations across sectors and jurisdictions. They are designed to solicit information that can be included in mainstream financial filings. They are designed to help companies provide better information to support informed capital allocation and can assist investors in determining if climate risk is appropriately priced into the valuation of the entity.

References

1.       Essential Guide to Engaging the Board and Executive Management, A4S

2.       Annexes, Intergovernmental Panel on Climate Change

3.       Small and Medium Enterprises (SMEs) Finance, The World Bank

4.       SMEs: Key drivers of green and inclusive growth, Shashwat Koirala

5.       Calculating the Carbon Footprint and Minimum Greenhouse Gas Production of SMEs in Southeast Asia, Michael T Schaper and Ryan Wong Yee Yang

6.       Consumers demand greener products in the wake of pandemic, Circular

7.       How consumers are embracing sustainability, Deloitte

8.       Essential Guide to Incentivizing Action Along the Value Chain, A4S

9.       Sustainable story, Adnams

10.   Annual Report and Accounts 2021, Page 23, Adnams

11.   Six megatrends revolutionising your supply chains, Cambridge Institute for Sustainability Leadership

12.   The profile for Salesforce: Climate leaders in the ‘Communicating integrated thinking’ and ‘Embedding an integrated approach’ categories at the Finance for the Future Awards 2021, ICAEW

13.   Why ESG factors in the supply chain matter, Principles for Responsible Investment

14.   ESG-related supply chain issues, Linklaters

15.   UK sustainability grants for business, British Business Bank

16.   Sustainable Debt Issuance Breezed Past $1.6 Trillion in 2021, Bloomberg NEF

17.   A4S Academy 2021 Yearbook, A4S

18.   Calculating your carbon footprint, NatWest

19.   Sustainability reporting instruments worldwide, Carrots & Sticks

20.   What is the Paris Agreement?, United Nations Climate Change

21.   Climate Change 2022: Mitigation of Climate Change, Intergovernmental Panel on Climate Change

22.   What is the Paris Agreement?, United Nations Climate Change

23.   Net Zero Tracker Beta, Net Zero Tracker

24.   Net Zero Stocktake 2022, Net Zero Tracker

25.   SMEs equipped to join race to net-zero with dedicated climate disclosure framework, SME Climate Hub

26.   Carbon and Energy, Burberry

27.   Burberry to be climate positive by 2040, Burberry

28.   From Now to Net Zero: A Practical Guide for SMEs, Lloyds Bank

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