Five reasons SMEs are taking climate action

Vishnu Nair

Head of Operations, Zeigo Activate

Being part of the climate action solution can be a motivation in its own right. However, several other factors are also driving small and medium-sized enterprises (SMEs) to take action now. They include these five vital reasons.

1. It makes strong business sense

Often, what’s good for the climate (and for reducing a company’s emissions footprint) is also good for the business bottom line. Nowadays, ‘green’ interventions like energy efficiency upgrades, renewable energy procurement and fleet electrification have speedy returns on investment (ROIs), translate into substantial cost savings and are cheaper than business as usual. They also insulate SMEs from the costs of climate inaction, which will be addressed in other parts of this article, such as transition risk and physical risk.

2. Business-to-business (B2B) customers are asking for it

For SMEs whose customers include large corporations, there is a very good chance those bigger companies have sustainability and climate-related goals, including emissions-reduction targets and possibly net-zero targets. For example, according to the Net Zero Stocktake 2022, as of June 2022, more than one-third of the world’s 2,000 largest publicly traded companies had net-zero targets — a more than 50% increase since December 2020.

Such companies are increasingly looking down into their supply chains — to SMEs — to make their decarbonisation efforts comprehensive. This is also known as Scope 3 decarbonisation. Regardless of what it’s called, SMEs need to respond with decarbonisation efforts of their own.

3. It reduces physical risk

Physical risk refers to the changing climate’s direct impact on business facilities and operations. Think coastal and inland flooding, wildfires, increased frequency and severity of severe storms such as hurricanes, drought and other changes to the climate that could negatively influence a company’s factories, offices, staff, services, products, upstream suppliers and/or downstream customers.

For example, if the impacts of the climate crisis risk making power grid blackouts more common, that could be highly disruptive for an SME. This makes strategy, such as installing on-site solar paired with battery energy storage, much more than a sustainability initiative that reduces a company’s emissions footprint. It also becomes a strategic business initiative that bolsters resilience and supports business continuity — even in the face of challenging, climate-induced events like severe storms and wildfires.

To this end, the London School of Economics and Political Science cautions that SMEs are ‘locking in’ future physical climate risks by not taking climate action today. Further, aside from the obvious direct impacts of adverse events, failing to take climate action leaves SMEs exposed to heightened liability and higher insurance costs. As the Harvard Business Review noted in August 2022: ‘As climate risk grows, so will costs for small businesses.’

Often, what’s good for the climate (and for
reducing a company’s emissions footprint)
is also good for the business bottom line.

4. It reduces transition risk

Transition risk refers to the way nonphysical, climate-related changes can impact businesses. This can include new or updated national, regional or local policies; issues related to regulatory and code compliance; market reforms; and/or accounting and reporting requirements.

For example, in January 2023, the EU’s Corporate Sustainability Reporting Directive came into effect. It updates rules about the sustainability information that companies have to report and applies to large companies as well as listed SMEs. Because the directive also addresses value chain due diligence, other SMEs should also be prepared to provide emissions accounting documentation for their larger customers that are required to report under the directive.

Meanwhile, in March 2023, the EU released its proposed Green Claims Directive on making and justifying environmental claims — governing both companies’ claims about their own sustainability efforts as well as those associated with their products or services.

Across the pond in the United States, the U.S. Securities and Exchange Commission (U.S. SEC) is on its way to issuing climate-related financial disclosure requirements for companies. The exact timing and final nature of the requirements remain a question, but in a recent survey of 300 corporate executives at U.S. public companies with revenues above $500 million, 98% of respondents said that they may not wait until the SEC regulations come into effect to initiate climate disclosures.

Although the U.S. SEC requirements may not directly target SMEs, similar to the EU directives, there will likely be a ‘trickle-down’ effect from SMEs’ large corporate customers.

5. It bolsters brand reputation and makes SMEs more competitive

Finally, climate action supports less tangible, but still material, aspects of a business. For starters, study after study confirms that sustainable businesses do a far superior job attracting and retaining top talent as employees. Part of that attractiveness comes down to elevating a company’s brand reputation for being ‘green,’ paired with actions that authentically live up to the promise. This same brand reputation issue likewise translates into two forms of competitive advantage:

1. For business-to-consumer (B2C) SMEs, sustainability and climate efforts translate to heightened consumer demand and stronger business growth. For example, joint market research by McKinsey & Co. and NielsenIQ, published in February 2023, found that products making ESG-related claims averaged 40% higher cumulative growth over the past five-year period versus products that made no such claims.
2. For B2B SMEs, sustainability and climate efforts translate to competitive advantage compared to other companies in their market that find themselves on the wrong side of a ‘brown discount.’ As more and more large corporations place sustainability requirements on their suppliers, not taking climate action puts SMEs at a business disadvantage.