NET ZERO – Getting Serious About SMEs

This article focuses on the importance of SMEs and mid-caps in the transition to net zero, and the challenges they face.

If you’d just landed from outer space and made the effort to peruse the press, you’d be conflicted about whether this planet is really committed to not screwing it up for the current and future generations.?

However, looking beyond the headlines you’d see a world getting a significant amount of decarbonisation stuff done (albeit not fast enough), driven by a broad consensus that net zero by 2050 is a destination that is both critical and just about achievable.

Energy transition is a real thing that is happening.? Renewables are growing, transport is decarbonising, amenities are progressing, hard-to-abate industries are pursuing low carbon alternatives, and we know what needs to happen with agriculture.?

We know many of the solutions, and for many the commercial case is in the right ballpark.? Yes, many solutions are early doors and still need to be proven, but we have a lot to be getting on with.? ?

We know all this.? Examples (and opinions) pepper pretty much everyone’s LinkedIn feeds, every day.? However, as we know, the commercial cases need to be proven again and again, and hard stuff needs to get done, and rarely does it go right first time (contrary to what my Stephen Covey course told me in my first job).

This all matters because the transition will be enabled by commercial entities, supported/enabled by governments (not the other way around).? If the commercial economics don’t stack up there’s not enough collective government financial pixie dust that can be sprinkled to match the minimum estimated $2-3tn of investment required per year to fund the transition. ?

Much of the running to date has been made by large corporates.? Take your pick on one or more of the potential route causes - they've started early, they’ve seen the potential to create sustainable differentiated positions, they are most implicated, they have strategy functions to lead the thinking, they have created break outs to lead the initiatives, they have the financial flexibility to experiment, and in some cases they have the financial luxury to bring in big brains from large consultancies to shape and steer their “pathways”.

What I believe we are seeing now is a realisation amongst SMEs and mid-caps, that carving out a pathway to net zero is not optional from a commercial and regulatory point of view.

I would contest that there is a growing acknowledgement that decarbonisation is an imperative to maintain a competitive position, especially if you’re up against one of those large corporates and/or are a supplier to them. ?Looking down the other end of the telescope, they matter in delivering net zero. According to the European Commission, in the EU, SMEs account for ~60% of emissions and ~56% of economic value. ??

What’s more, in the EU, from a regulatory compliance point of view things just got serious.? On 31st July the Commission adopted the European Sustainability Reporting Standards (ESRS)[1] for companies subject to the Corporate Sustainability Reporting Directive (CSRD)[2].??

The CSRD is the 2014 Non-Financial Reporting Directive (NFRD)[3] on steroids, significantly broadening the reporting requirements on mid-caps/large enterprises and expanding the net from ~11,700 to ~49,000 enterprises, taking this into the purview of SMEs and mid-caps (accepting that the German government have apparently entered the debate 2 minutes after midnight, challenging the SME threshold – watch this space).

Whilst the CSRD covers environmental (E), social (S) and governance (G), “E” is the biggest slice of vegan meat substitute in the CSRD sandwich.? The CSRD takes the NFRD’s reporting requirements as the starting point, then goes a whole lot further.?

It’s now about “double materiality”.? The CSRD goes beyond requiring companies to identify their impact on the environment.? They also, critically, need to identify the financial impact of being compatible with a world that limits global warming to +1.5OC (in line with the Paris Agreement).?

Let’s think about that for a second.? Companies now need to show they have done the risk assessment of the gap to operating within this sustainability boundaries and are able to articulate a business model and the related prevention/mitigation/remediation/enablement actions and investment plans to achieve this point.? In short, developing a net zero plan!?

Finally, disclosure needs to go through statutory audit, hence there is no ‘just making it up’. ?

The key point here is that this is not about reporting – it’s about thinking and doing, about what and how, about strategy and action.?

If you look at this, especially from the point of view of SMEs, I would contest that they start from a very different position from large corporates.? They probably get the overall net zero storyline, they see some of the immediate implications, and in many cases have initiatives in play that are the front end of their response.?

However, as one CEO said to me “…we’re doing loads of stuff, but we know that we now need to professionalise our approach.? It’s time to get serious”.? Now that’s a statement worth tattooing on your forehead.

I suspect that many of these organisations want very practical help from experts, who’ve been there and done it.? They want help from seasoned professionals to clarify direction, nail the key initiatives, and help to build real commitment across their organisation to get momentum (then get out of the way!).? They almost certainly don’t have the budget to pay for armies of advisors, even if they had the inclination.? In fact, many just don’t buy consultancy services, period!

In closing, and shamelessly stealing the final line from The Scientist, I’m going back to the start.? I think that those Ferengi[4] landing from their far-off galaxy would appreciate the powerful commercial reasons for accelerating the energy transition and why SMEs and mid-caps would want a piece of this (and why we need them).

Finally, before I am deluged with feedback from highly sophisticated and experienced practitioners, I get that all of this has to be anchored by more clarity and commitment from governments, which is lacking in many cases (and in many situations heading in the wrong direction), but I will leave that one for another day.?

That said, if we crack the SME and mid-cap question, we may just have made a real dent in the gap to net zero!

PS: thanks for accommodating my subtle/not so subtle littering of lyrics in the article (and Star Trek references).??

[1] The Commission adopts the European Sustainability Reporting Standards (europa.eu)

[2] Corporate sustainability reporting (europa.eu)

[3] Commission guidelines on non-financial reporting (europa.eu)

[4] Ferengi - Wikipedia