Can SMEs lead the charge towards net zero?

The UK’s goal for net zero by 2050 is beginning to feel unachievable. Mandating climate disclosure for the nation’s 5.5 million SMEs could help but small businesses will need to be proactive

small business owner sustainability

In 2022, The Companies Act 2006 was amended to legally require the biggest UK firms – those with 500 or more employees and £500m in turnover – to disclose sustainability-related information in their annual strategic reports. This amendment now covers more than 1,300 of the largest organisations in the UK economy and instructs them on how to declare their climate action strategy. 

Legislation like this seems to make a difference. Research shows that there has been a decrease in climate emissions from companies since carbon reporting requirements were introduced in the UK in 2013. 

The UK government has spoken about extending mandatory disclosure to the rest of the UK economy. Currently, there is no emissions-reporting mandate for UK SMEs, which make up the vast majority of the UK economy. The government has previously called on small businesses to lead the charge for net zero, but more must be done if the UK is to meet its net-zero target. The government has previously signalled its intention to roll out mandatory emissions reporting standards across the entire economy by 2025.

Compliance with emissions reporting requirements

A significant proportion of SMEs are already attempting to reduce their climate impact voluntarily. For instance, the majority of UK B Corps – companies recognised by B Lab, a non-profit, for their social and environmental impact – are firms with fewer than 250 employees. Matthew Cotton, professor of public policy at Teesside University, confirms that businesses of all sizes are increasingly committed to emissions reduction and sustainability.

But there are segments of the small-business community that could undoubtedly improve their sustainability efforts. Recent analysis suggests that 76% of UK-based, VC-backed startups have done nothing to combat climate emissions. And despite their voluntary efforts, SMEs still contribute roughly 44% of total non-household emissions in the UK.

Trevor Hutchings, sustainability partner at consultancy BIP, points out that businesses falling under the SME banner are not a homogeneous group. They can range from family-run, micro-SMEs to organisations with millions of pounds in turnover and hundreds of employees.

As carbon emissions accounting and reporting can be complicated and expensive, there is a concern that the burden would be too much for small businesses to manage.

Compliance is a resource-intensive task, potentially requiring significant amounts of financial and human capital; resources that many SMEs may not be able to spare. For legislation to be effective, it would need to be nuanced and to carefully consider the burden imposed on businesses, stresses Hutchings.

Emissions reporting won’t guarantee organisational change

Even if SMEs can shoulder the compliance burden, reporting requirements alone will not necessarily lead to greener business operations. Although research suggests that mandated emissions reporting does produce some environmental benefit, there is an argument that sustainability and emissions-reduction goals must be sewn into the fabric of an organisation to bring about real change.

Reporting requirements are not an effective means to change organisational culture

Here, Cotton emphasises that “reporting requirements are not an effective means to change organisational culture.” There is a risk, he says, that compliance with these requirements becomes a tick-box exercise, as organisations try to manage complicated reporting processes, rather than implement meaningful change.

Scott Kelly, senior vice-president at Risilience, a climate analytics platform, agrees that a focus on sustainability must begin at the top of the hierarchy. “One of the mistakes that big companies make is that they think sustainability can be delegated to personnel lower in the management chain,” he says.

One way to motivate support for sustainability at the senior level is to emphasise the tangible benefits of sustainable practices. As Hutchings points out, financial performance is increasingly correlated with sustainability as whole economies and industries move towards net zero and carbon neutrality.

How SMEs can get proactive about emissions reduction

How or when UK reporting regulation might be amended to cover SMEs is unclear. Kelly notes that the government will of course have a central role to play in guiding the trajectory of the UK’s long-term sustainability goals. But regulation aside, SMEs may benefit from minding their emissions and maintaining a strong focus on sustainability.

But whether or not reporting regulations are extended to cover SMEs, smaller businesses may benefit from proactively devising a plan for emissions reporting and reduction.

A good place to start is to build an understanding of your current emissions balance. Looking at scope 1 emissions – the emissions directly generated by a business – is step one. A carbon accounting platform can be of great benefit here.

The government is also starting to provide small businesses with more detailed guidance on things like heating, green transport and green energy generation and procurement. There are now various schemes and subsidies to help and support SMEs switch to greener choices.

Finally, Kelly believes that smaller businesses can learn a lot from the experiences of larger businesses that have had to contend with emissions reporting requirements over the past five to 10 years. Companies’ Task Force for Climate-Related Financial Disclosure reports are publicly available, and these provide examples of tracking and reporting frameworks.

There are also several business-led consortiums where firms can come together to share knowledge and best practices. Kelly says that joining an alliance like the UK Business Group Alliance for Net Zero or the British Retail Consortium can help businesses access support for their sustainability initiatives and emissions reporting.