Big businesses can’t afford to overlook SMEs in their supply chain
Lydia Elliot, deputy director of supplier decarbonisation
This article was first published in Edie.
Tackling supply chain emissions is a necessity for any business serious about driving down its climate impact. There is a growing trend among the world’s biggest brands to work closely with suppliers on climate action, with large companies employing a range of tactics to help their suppliers decarbonise.
COP29 underscored the need for a holistic and system-wide approach to tackling the climate crisis. Yet one critical area that is being left behind is small- and medium-sized enterprises (SMEs). Representing 90% of all businesses and contributing over 50% of global GDP, SMEs are the backbone of the global economy. According to recent estimates from the OECD and European Commission, together SMEs contribute around 40% of total business sector emissions in Europe.
Yet because the emissions of each individual SME are low, many are being left out of companies’ supplier engagement efforts. According to a recent survey from the SME Climate Hub, only 17% of SMEs had been asked by their corporate customers to reduce their emissions. While SME engagement does not have to look the same as companies’ engagement with larger strategic suppliers, it is essential that it happens.
Here are three reasons why companies should start integrating SMEs into their supplier decarbonisation plans:
1) To enhance supply chain resilience
Climate-related disasters are multiplying around the world, and businesses are feeling the impacts. According to Oxford’s Environmental Change Institute, nearly nine in ten major ports globally are exposed to damaging climate hazards, resulting in escalating economic impacts on global trade.
SMEs are on the front line. Two-thirds of SMEs in emerging markets reported already being affected by climate change, with impacts to physical assets, facilities and employees. SMEs may be ill-equipped to assess their risk and make a plan to withstand climate shocks.
When SMEs are affected, the impacts are felt throughout global value chains. For example, a 2023 report found that more than a fifth of the items in a typical British grocery shop were at risk from climate breakdown, with farmers in the biggest food-exporting countries to the UK facing high climate vulnerability.
Through the provision of training, tools and resources, companies can help their smaller suppliers start addressing their exposure to risk and better prepare for climate impacts. Resilience-boosting actions for SMEs include investment in more resilient infrastructure, diversifying supply chains, and investing in green technologies, as well as basic steps like adequately insuring their business.
2) To enable a just transition
People must be at the centre of climate action. This means greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities, and leaving no one behind.
SMEs account for around 70% of jobs worldwide and have deep connections with local communities. They have a central role to play in delivering a just transition to a zero-carbon economy. It is critical for communities and livelihoods that SMEs do not get pushed out of supply chains as a result of being unprepared for incoming climate standards and requests – and companies higher up the value chain have a clear opportunity to support SMEs in the transition.
SMEs need time to learn, prepare and implement emissions savings in their business. The demand is there, with close to nine in ten SME bosses saying that environmental action is important to their business. Working with SMEs is an important way for companies to ensure they are approaching supply chain sustainability holistically, and thinking beyond just emissions.
3) To contribute to systemic change
In order to deliver the Paris Agreement, system-wide transformation is required. Whilst the highest emitters must decarbonise, we need to see low-carbon business become the new global norm which means SMEs must be brought on board. Corporates have a clear role to play in helping to set a reasonable global norm for SMEs, and supply chains are a powerful means of sending a clear, consistent message to large numbers of companies at the same time.
When climate action becomes an economy-wide norm, every company stands to benefit. For large corporates, it will be easier to track progress in their supply chain, fulfil their reporting obligations, find new low-carbon suppliers, and deal with incoming climate legislation. One example is the EU’s Carbon Border Adjustment Mechanism, which puts smaller businesses and their larger customers at risk if they are unable to comply with the new regulations.
Moreover, the potential impact of SMEs transitioning to low-carbon business models is huge. Their commitment to sustainability can drive economic growth, create new green jobs, foster innovation in sustainable practices and technologies, and push for stricter environmental standards and regulations that benefit the entire ecosystem. SMEs are key partners for larger companies looking to harness opportunities in the low-carbon transition.
A tailored SME approach
It is vital for businesses to include SMEs in their supplier decarbonisation programmes. Crucially, this engagement does not have to look the same as the engagement with larger suppliers. It could, for example, centre around giving the SMEs information, helping direct them towards capacity-building resources, providing incentives, and highlighting that climate action and resilience measures are important to their company.
IKEA and BT Group are among the big brands working to mobilise the SMEs in their value chains to join the SME Climate Hub, a one-stop shop for SMEs to access free tools and resources for cutting emissions.
Individually, their emissions may be small, but SMEs’ collective impact and potential to drive change at speed and scale is huge. Large businesses must give SMEs the opportunity to learn, work on their climate action, and future-proof their business in order to exist in a global supply chain and align with incoming legislation.
SME engagement represents a massive opportunity for corporations to build resilience, support a transition that centres people and communities, and embed low-carbon business as the norm – a win-win for everyone.
Click here to learn more about the SME Climate Hub’s resources.