Back in 2014, a HuffPost Contributor article called small businesses the “neglected middle” between our homes and the skyscrapers of big businesses when it comes to the climate crisis. While progress has been made since, it is still the case that when we think about businesses’ part in reducing greenhouse gas (GHG) emissions, we tend to focus on large multinationals.
The urgency of the climate crisis means that we need all hands on deck so, clearly, a group of businesses as numerous as small and medium-sized enterprises (SMEs) will have an important role to play. While each SME on its own is small, added together their GHG emissions mount up—for example, our research shows they account for nearly half of UK businesses’ GHG emissions. Furthermore, reductions in SMEs’ GHG emissions are a key—but easily overlooked—piece of the puzzle for large businesses looking to decarbonise.
Supply chain key to emissions cuts
The GHG emissions of SMEs in a company’s supply chain will generally represent a substantial part of that company’s overall “scope 3” emissions. Scope 3 emissions (all the indirect emissions in a company’s value chain except those associated with purchased or acquired energy) are typically the largest part—often 70-75%[1]—of a company’s GHG footprint. Moreover, the significance of emissions from SMEs in the supply chain may well grow in coming years and decades. Emissions from electricity generation are likely to fall as renewables such as solar and wind power produce an increasing share of electricity and heavily-polluting coal is phased out globally. Meanwhile, many large companies have committed to decarbonising and as a group, they are the focus of many green policy initiatives and financial support packages. This may leave SMEs, which face particular barriers to decarbonising, representing an increased share of residual emissions.
As a company’s scope 3 emissions take place outside its organisational boundary, they are more difficult to measure and harder to exercise control over than other GHG emissions. This makes it tempting to focus on emissions within a company’s direct control. But scope 3 emissions are crucial to understanding and addressing a company’s overall climate impacts and—importantly—the associated risks. This means that measuring, reporting, and managing the carbon emissions embedded in the supply chain, including a focus on SMEs, is an important piece of the puzzle for large businesses looking to navigate the green transition.
In light of this, companies are increasingly being called on to disclose and tackle emissions in their supply chains. For many companies, the pressure to take scope 3 emissions seriously will go beyond encouragement. Scope 3 emissions are explicitly addressed within emerging disclosure standards such as those of the International Sustainability Standards Board, the recommendations of the Taskforce on Climate-related Financial Disclosures, and the EU’s European Sustainability Reporting Standards. Disclosures in line with such standards are increasingly being demanded by market stakeholders and mandated by governments and regulators. The direction of travel is clear: more and more companies in more and more jurisdictions are likely to be required by regulation to report and manage their scope 3 emissions.
A win-win-win result
Clearly, then, large companies are going to have to tackle the GHG emissions of SMEs in their supply chains. While challenging, there are also many benefits to doing so. Acting now will help to get ahead of regulatory requirements and prove easier in the long run. Moreover, it is good business since it can help to manage transition risks—the risks associated with the transition to a decarbonised economy. These risks can take a range of forms. For instance, policies aimed at encouraging a transition, such as increased carbon taxation, could cause an increase in heavily-polluting companies’ operating costs which could, in turn, be passed on to businesses buying from them. Helping supply chain partners, especially SMEs, to decarbonise helps to manage the financial and reputational risks like this that businesses could face during the green transition.
Large businesses are, because of their greater financial resources and capacity, well-equipped to support their SME suppliers in overcoming the barriers they face to decarbonising. This promises a “win-win-win” that can be achieved when large businesses support their SME suppliers to decarbonise: a win for SMEs in reducing their emissions, a win for large businesses in managing their scope 3 emissions, and a win for the planet and the people that call it home.
Luke Pate is an economist in the Economics & Sustainability team at Oxford Economics
[1] See, for instance, https://www.unglobalcompact.org.uk/scope-3-emissions/.
