COP27: How do SMEs reach Net Zero?

This week, Scottish First Minister Nicola Sturgeon stated that leaders must ‘set the vision and create mission-oriented institutions that facilitate getting finance for a purpose.’ The UK government also stated that “greening the financial system is an integral part of plans for the future of the UK’s financial services”. However, particularly given the current climate, financial products that incentivise green initiatives for SMEs also need to be offered to promote change.

UK SMEs are responsible for approximately 25 percent of the country’s CO2 emissions. If SMEs do not reduce these emissions, the UK will be highly unlikely to meet its climate goals and yet almost two thirds (64%) of businesses don’t see sustainability targets as a high priority.  

The grass could be greener

Bogged down by other urgent expenses, many business owners view their environmental responsibility as another cumbersome cost. Yet implementing sustainable practices often drive business performance. For instance, by lowering energy output and costs, SMEs can improve capital efficiency significantly at a time when this is an ever-growing business cost.

To stem and reverse industry opinion that, these businesses require the requisite infrastructure and support to allow sustainability goals and commercial viability to co-exist. Rather than the constant threat of the proverbial stick, SMEs need to be offered a carrot as well. A sector-wide effort has to be made, with support from both the private and public sectors to meet net zero targets. 

While the past year has been a rollercoaster for many entrepreneurs, the reality is that little progress has been made around sustainability among UK SMEs since COP26 a year ago. 75% of SMEs are aware of the government's commitment to reach net zero by 2050, 1 in 4 said they did not know how the goal would affect them.

There is a level of apprehension around green finance among SME lenders due to a lack of knowledge in the industry. Our green finance marketplace has seen strong demand from SMEs, but the supply does not match up. As a result, there is a growing funding gap which needs to be plugged as soon as possible.

Three steps to go green

Last year, British Business Business Bank research showed that costs, feasibility and access to finance remained the biggest barriers to reducing carbon emissions and that has not changed.

A funding vehicle, facilitated by the state-owned British Business Bank, needs to be made available to enable lenders to originate loans to sustainable-oriented business and for sustainable-related purposes.

Alternative lenders need to be given a mandate which allows them to offer green lending products to businesses that qualify. A year on from COP26, very little has changed and the reality is that action needs to be taken now. The alternative finance community possesses the necessary agility to facilitate green loans at speed. 

Finally, there needs to be a government promoted standardised form of assessment to be able to categorise the extent to which a business is green. Laying this foundation and providing clarity on what sustainability means for business will be crucial to moving the dial. Once we have the framework from a government body in place, which properly defines green finance, every lender can then create products that meet demand and are fit for purpose.

For too long the onus has been on innovative businesses and individuals to make a difference on climate action and it often feels like many are banging their heads against a brick wall. 

Climate conferences and pledges are all well and good but the current situation demands action. We have seen the government move swiftly on support schemes such as CBILS and, more recently, around energy bills in the public interest. The time is now for the government to step up and provide a well thought out, step-by-step plan offering both the carrot and the stick for businesses to achieve better outcomes at scale.