No Net Zero Without SMEs: Strengthening Policy and Collective Action for SME Greening

No Net Zero Without SMEs: Strengthening Policy and Collective Action for SME Greening

Céline Kauffmann, Lucia Cusmano | June 27, 2022 |

Small businesses' carbon footprint matters

Countries around the world are faced with a pressing need to take action on climate change mitigation and many have set ambitious policy targets for a more sustainable economy. Such ambitious targets demand profound transformations in how our economies and societies work, and require that all economic actors and societal groups are fully aware of their role and engaged in the transition. In particular, achieving these targets require all firms to invest in greening their businesses.

Small and Medium-sized Enterprises (SMEs) are neither an exception nor a supporting actor in the journey; on the contrary, they are an essential engine to the green transition. While the environmental footprint of individual SMEs may be small, their aggregate impact is substantial. Empirical evidence points to a contribution of 60-70 percent to industrial emissions, as well as to other aspects of environmental degradation such as waste.

SME greening can boost competitiveness and catalyse growth

The stakes are high. Inaction on SME greening can impact broader policy objectives towards sustainability, and have profound implications for individual business survival, the resilience of productive networks and supply chains, and the long-term competitiveness of national and regional economies.

Greening is a pathway for small businesses to reduce costs and increase productivity. Accelerating energy efficiency in SMEs could Iead to costs savings in the range of 10 to 30 percent of their energy demand. Improved energy efficiency can strengthen small business resilience by reducing exposure to energy price volatility and uncertainty.

Greening is also a major innovation and market opportunity: young firms and SMEs are targeting growing markets of green goods and services, small businesses are implementing circular economy strategies, and entrepreneurs are contributing to environmental solutions and innovating green business practices and models.

With the increasing regulatory and societal pressure, greening is finally evolving into a sine qua non condition for participating in supply chains, at the global and local level, and for accessing essential resources, such as finance. While formal environmental, social, and governance (ESG) requirements remain mainly a matter for large businesses, there are important trickledown effects through, for example, supply chain relations (e.g. large companies committing to foster good ESG practices with suppliers) and the financial sector (e.g. banks dropping clients that present ESG risk or deselecting "brown" industry segments).

SMEs are stepping up their greening efforts but face important barriers

An increasing number of SMEs are taking steps to green, by devising and implementing strategies to be more resource efficient in energy, waste and water use. However, they still face major challenges, such as a lack of information and awareness of opportunities, regulatory hurdles, and limited access to knowledge networks, innovation assets and resources (including finance).

Even when SMEs have environmental aspirations, uncertainty about the business case for greening continues to weigh on their decisions. Entrepreneurs perceive trade-offs between short-term costs and long-term benefits, with uncertain and often lengthy pay-back times. Helping SMEs to address such trade-offs demands an improved understanding ofopportunities and challenges that vary with size, sector, supply chain, location, and stage in the journey to net-zero.

Policy can play an important role but net-zero strategies need to take the SME perspective into account

Governments increasingly recognize the importance of SMEs and entrepreneurs for reaching net-zero objectives. The COVID-19 pandemic has exposed vulnerabilities in the SME population, but it has also highlighted the agility of many small businesses and the important contributions of innovative entrepreneurs in addressing societal challenges. Across OECD countries, governments are leveraging recovery and resilience plans to reset policies and practices in favor of more sustainable growth. However, a change in gear is needed when it comes to boosting the green transition among SMEs: SME-related support amounts to less than 3 percent of the total financial support for greening in recovery packages across more than 90 countries.

As we ramp up ambitions towards net-zero, we need to ensure that the perspectives of SMEs and entrepreneurs are taken into account in environmental and climate policies, and that greening is fully incorporated into the strategic objectives of SME and entrepreneurship policies. This also involves regulatory approaches, which tend to exempt smaller entities rather than considering at the outset their perspectives and ability to comply.

ESG regulation is a case in point: SMEs may be taking ESG actions without talking the ESG language. It is essential that actions to mobilize more financial resources for sustainability are complemented by non-financial support - for example, assistance with ESG reporting and engaging all players in the SME ecosystem.

The OECD is stepping up efforts to support policy makers and stakeholders

In November 2021, the OECD launched a new Platform on Financing SMEs for Sustainability, which aims to strengthen international knowledge-sharing and collaboration on SMEs' access to sustainable finance. The OECD is developing a dashboard of SME greening indicators to address major knowledge gaps on SMEs' environmental footprint and progress towards sustainability. The OECD's assessment of policies to support green entrepreneurship puts a spotlight on innovative approaches to tap into the potential of entrepreneurship to address climate challenges. The new OECD Recommendation on SME and Entrepreneurship Policies contributes to the sustainability agenda by providing an actionable framework for coherent and effective policies, recognizing that synergy across policy areas and among diverse actors is crucial for SMEs' transition to a sustainable future.

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