Small firms are a big part of the world’s drive toward hitting emissions targets
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The debate about the transition to net-zero economies is focused exclusively on large companies, with multinational groups particularly in the spotlight. But this ignores the role of small and medium-sized enterprises, which do not attract the same press headlines. This is a mistake, as some surveys in advanced economies note, that SMEs account for around half of a country’s business emissions. More worryingly, very few SMEs said they measured their carbon footprint or even set emissions targets.
Excluding smaller firms from cutting emissions will be counterproductive as involving them would make SMEs part of the solution, not part of the problem. However, given different definitions of what counts as an SME in different countries, coming up with an agreed global solution becomes more difficult.
There is also a wide range of attitudes toward carbon reduction, not only from SMEs, but from their larger national and international counterparts. Are firms proactive in combating emissions, driven by deep-seated corporate convictions or shareholder pressure, or merely reacting to potential financial penalties and regulation risks?
But the evidence suggests that some SMEs are also under pressure to perform on greenhouse gas emissions, sometimes by socially-active retail clients. And sometimes from larger companies they sell to as part of a wider supply chain. These SMEs have to report to large firms on their emission standards, because failing to do so might mean they lose out on lucrative contracts.
Pressure on smaller firms can also come from those that are owned by private equity firms waiting for the right market conditions to sell or list these companies. The last thing these owners want is to have their clean emission sustainability credentials damaged. Demonstrating high greenhouse emissions standards ahead of a potential initial public offering of an SME can lead to premium prices being charged on listing, so altruism and the desire to make money can happily co-exist for such private equity firms.
Sometimes, the actions taken by SMEs to reduce their greenhouse emissions can be small, practical steps such as installing smart meters, changing to renewable energy providers and switching to sustainable supply chain partners. For this to be effective, SME support groups need to be set up to pass on their experience to others and in countries like Saudi Arabia, the local chambers of commerce and industry SME bodies can help set up networks.
However small these steps add to a firm’s running costs. The SME sector must receive a sympathetic hearing for green financing from institutions that are more attuned to funding larger clients. Some large SMEs can rely on internal resources, but much green finance will have to come from banks as well as government soft loans and grants.
Governments will also have to take fiscal measures, such as reducing corporate taxes. Venture capital companies are also an important partner to small firms and will have a role in setting up SME collectives to pass on their experience to others.
The greenhouse emission debate rolls on with more urgency and while the focus of the media is naturally likely to remain on the carbon-reduction efforts of big blue-chip firms. But now it is more important than ever that the finance market and governments pay more attention to SMEs as part of a global emission solution.
In the wider Gulf, but in Saudi Arabia in particular, the Kingdom’s Vision 2030 social and economic reform program sets great store in supporting and promoting the SME sector as a valuable contributor to the non-oil economy. An SME bank has been established to overcome the reluctance to lend to this sector by traditional actors.
Recent large-scale conferences held in Riyadh on mining, the high-tech industry and climate change issues have referred to the importance of including all economic players in these issues. Leaving small firms out of these conversations will only serve to hinder the world from hitting emission targets. Let’s not forget that many of the large global corporate giants of today started out as a small firm in a garage like Apple.
• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran.
