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Friday, Mar 31, 2023

Net zero: Like small nations, small firms need a helping hand too

Net zero: Like small nations, small firms need a helping hand too

SMEs, a major contributor of industrial emissions, are very much left out of the global climate strategy. We need to start treating them like small countries and applying ‘loss and damage’-style solutions
The COP27 UN climate change conference in the Egyptian resort town of Sharm el-Sheikh ended with a victory of sorts for developing countries with the “loss and damage” deal. But the role of small and medium-sized enterprises in making the critical transformation to net zero is still not getting the attention it deserves.

The global debate on corporate emissions has often focused on big companies, especially fossil fuel producers, when SMEs are a major culprit too. As a group, SMEs are responsible for 60-70 per cent of industrial pollution in Europe alone, according to the Organization for Economic Cooperation and Development.

Reaching net zero is impossible without a strong global SME decarbonisation strategy, especially when they are an integral part of global supply chains. Yet discussions on the role of SMEs in decarbonisation remain largely limited to the local level in many countries, and the perspectives of SMEs and entrepreneurs are not considered in global climate policies.

Since the individual SME environmental footprints are small, SMEs’ role in pollution such as industrial waste often go unnoticed. We need to think of SMEs as the world’s smaller countries against the big corporations that, like the bigger countries, are always in the spotlight.

To put things into perspective, the world’s most polluting country per capita is Qatar, whose population of less than 3 million emits more than 35 tonnes of carbon dioxide per person, more than twice the United States’ and four times China’s. Next on the list is Bahrain and Kuwait, also tiny countries that escape mainstream climate attention.

Unlike with big corporations, individual SME emissions are much harder to audit and most SMEs do not even have the right level of education to participate in the global decarbonisation journey.

Also, many SMEs are reluctant to make the green transition as costs may affect business survival. Most do not understand that a sustainability transformation can reduce operational costs and increase productivity over the long run.

According to the International Energy Agency, energy efficiency improvements could help SMEs save 10-30 per cent of their energy costs, making them less vulnerable to energy price volatility. This is knowledge that could inspire entrepreneurs to produce more green technologies, lowering the costs of planet-saving while generating decent profits.

There is also the question of how to support SMEs to decarbonise. Each SME faces unique challenges in complying with environmental, social and corporate governance demands, and existing ESG rating systems are mostly designed around big corporations. There are also industry differences in adopting sustainability practices.

For instance, it is easier said than done to demand that medical industries ditch their dependence on plastics when so much medical packaging can only be safely performed with plastic. Or asking the sport industry to cut down on air travel for major events when this is hardly realistic and will kill it. There is simply no one-size-fits-all solution for helping SMEs go greener.

Hence, specialisation of sustainability solutions for each industry is required, let alone for the different SMEs of each industry. Unfortunately, we do not yet have enough experts leading efforts to provide customised sustainability solutions. Specialisation within the ESG space is badly needed.

But while many SMEs are not interested in any green transition at the expense of already small profits, help and support must still be made available for those ready to be on board now. It is well known that SMEs often struggle to access loans and capital from financial institutions, compared to big corporations.

To worsen matters, the Covid-19 pandemic has left many SMEs extremely financially vulnerable. For those dealing with pandemic restrictions with little financial support, attention can hardly be given to greening their businesses any time soon.

To address SMEs’ financial challenges, Malaysia’s government set up SME Bank, the first of its kind in the region. Throughout the pandemic, SME Bank has done phenomenal work in providing ESG capacity-building and funding opportunities for SMEs.

On top of launching carbon credit trading on the stock exchange, a move that mostly concerns big corporations, Hong Kong’s financial institutions could explore similar solutions to Malaysia’s SME Bank to support green finance for SMEs in the region and positively influence their mainland Chinese counterparts to do the same. Having a “loss and damage” fund for SMEs, for instance, could be revolutionary for climate change.

UN Secretary-General Antonio Guterres has declared the world is “on a highway to climate hell” and that our climate goals are “on life support”. We are certainly getting there when decarbonisation support for SMEs is still largely left out of mainstream discussions.

There have been encouraging signs. The role of SMEs in decarbonisation to reach net zero is gaining wider acknowledgement such as at the recent Asia-Europe Environment Forum I attended, but it is not enough. Let’s make it so COP28 ensures no business, big or small, is left behind in saving our planet. Failure to do so would be an injustice.

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