By Simon Cureton, CEO at Funding Options

Smaller businesses often have relatively low individual emission footprints, but it’s estimated that collectively they account for around half of UK business greenhouse gas emissions. When you add households and the public sector into the mix, smaller businesses account for around a third of total UK emissions, illustrating the critical role smaller businesses will have in the UK reaching net zero. It will not be possible without a step change in how smaller businesses operate.

Many business owners view their environmental responsibility as another non-essential company cost. However, implementing sustainable practices can often drive business performance. For instance, by lowering energy output and costs, SMEs can improve their capital efficiency significantly at a crucial time. Since COP26, the reality is that little progress has been made around sustainability among UK SMEs. To reverse this, 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. 

A deeper shade of green for SMEs

UK SMEs account for 99.3 percent of all businesses, playing a critical role in helping the UK achieve its climate change targets. There is a level of apprehension around green finance among SME lenders, primarily due to a lack of knowledge in the industry. Green finance marketplaces have 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.

Many SMEs are facing significant challenges caused by the impact of the pandemic, rising energy and maintenance costs and skills shortages and for those that export, the need to respond to new trading arrangements with the EU and beyond. It would be easy to see the move to net zero as one more burden, however, there are real opportunities from embracing the need for change. By reducing carbon emissions, businesses can save money by reducing energy and resource use. This will make them more competitive by reducing costs and it will also improve brand appeal as many customers are now actively looking for businesses with good environmental credentials.

A recent report from the British Business Bank found that 76% of SMEs are yet to implement comprehensive decarbonisation strategies. To make it straight forward for businesses to make net-zero changes to their business structure, we need to ensure they know what steps they can take and what support is available to help them decarbonise.

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.

What comes next?

The implementation of funding is vital to help facilitate climate action, with 69% of SMEs saying they need access to external funds to reduce their emissions faster or at all. What can banks and regulators do to overcome these challenges and open up a pathway to green financing for SMEs? First, the financial infrastructure needs to be enhanced.

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.