Why sustainability is so challenging for millions of SMEs

In short:

• SMEs are the backbone of our economies contributing up to 70% to the global GDP
• The pressure to become sustainable increases also for SMEs through regulation, investors, customers, and employees
• Resource-constrained SMEs need easy-to-use do-it-yourself solutions
• SMEs need one trusted “sustainability profile” they can share for reporting
• We need more cost-effective support that tells SMEs HOW to improve

SMEs are crucial for sustainable development

According to ILO data in many countries, more than 90% of all companies can be classified as micro-, small and medium-sized enterprises having less than 250 employees. They create about 70% of employment and estimates for their contribution to the global GDP vary between 50% to 70%. In short, these companies are important! They are the backbone of our economies. Just by procuring a new phone on Amazon, you involve countless SMEs. Most likely, they were involved in the production of countless raw materials and components in your phone. They were involved in all the logistics that delivered the components across our global supply chains. And most likely, if something breaks, a contracted service provider will respond to your customer complaints and initiate the repair. SMEs are everywhere and this gives them tremendous importance for the sustainable transition of our economies.

The pressure to become sustainable increases also for SMEs

At the moment, there is great momentum towards more sustainable development. Worldwide, we see civil society demanding change. Fridays for Future is probably the most prominent example of this, but all kinds of people realize the increase in heat waves, droughts, and extreme weather events. This translates into changes in consumer behaviors that begin to opt for vegetarian/vegan food, pay a premium for sustainable products or choose trains instead of planes. But this also translates into massive regulatory changes. The EU is taking the lead in this regard with regulations like the Sustainable Finance Disclosure Regulation (SFDR) or the upcoming Corporate Sustainability Reporting Directive (CSRD). These regulations push financial market participants and large corporates toward more sustainable actions.

So how does this momentum affect SMEs, the backbone of our economies? Some SMEs are certainly leading the change voluntarily. There are innovative SMEs (incl. startups) that create new sustainable solutions at the forefront of the sustainable transition. For instance, there are countless vegan food producers, new packaging manufacturers or refurbished IT providers and many more (see e.g. the dealroom impact landscape). But they are only a small share of the millions of SMEs out there.

A majority of SMEs struggle to take action beyond the legally required. But this approach is no longer sufficient. Increasingly, regulations like SFDR and CSRD affect investors in SMEs and the corporates that procure from SMEs. This creates a non-regulatory, but equally powerful pressure on SMEs. Due to the regulatory pressure, investors in SMEs and corporates procuring from SMEs make sustainability an important factor when they decide to work with an SME. We see that SMEs must do three principal things:

1. Assess properly how well they are doing
2. Report their performance to their investors and corporate partners
3. Improve to remain attractive in the long-run

Each of these three elements creates important challenges for SMEs, but done right they can become highly beneficial.

Assessments methodologies must become more digestible for SMEs

SMEs are more resource constrained. This means they cannot afford to invest 70k€ or more for an in-house sustainability expert or hire consultants with daily rates of 1k€ or more. This leaves many SME decision-makers with the challenge to deal with sustainability themselves besides the day-to-day operations. Naturally, the complexity of sustainability can quickly become overwhelming and the quality of assessments suffers under these conditions.

But done right, sustainability assessments help SMEs to identify environmental, social, and governance (ESG) issues that pose financial risks to them. Many of the benefits are well known. With the current increases in energy prices, the benefits of energy efficiency are a no-brainer. In the “war for talent” particularly SMEs search for ways to attract talent among the millennials and generation Z, who aim for purpose in their work and expect an inclusive, diverse, and family-friendly workplace. And there is no doubt that good data policies, anti-bribery, and tax compliance are governance issues with clear linkages to financially successful companies.

To harness these benefits of sustainability, resource-constrained SMEs need easy-to-use do-it-yourself solutions. We need solutions that make it easy to start with sustainability and allow them to dive deeper step by step.

SMEs should not have to fill out countless different reporting templates

Current reporting requirements are super confusing for SMEs. As there is no direct regulatory pressure with clear guidelines. Instead, SMEs face a lot of fuzzy indirect pressure from society, investors, and their own customers. Large corporate customers send out countless different ESG “supplier” surveys and a range of different labels. Some labels address the sustainable management of the entire company like BCorp or the Gemeinwohlökonomie and there are countless domain-specific labels around organic, fair trade, and many more. The countless surveys create tremendous effort for SMEs and obtaining the labels adds significant costs to hold the label and pay for external audits.

If SMEs manage the various labels and reporting templates properly, they can draw a lot of value from them. For instance, research from Professor Tensie Whelan from the NYU Stern School shows that products marketed as sustainable stand for 55% of growth in consumer-packaged goods. Similarly, the research suggests that these companies have far better chances to attract talent and obtain funding.

But to make these benefits more accessible for SMEs we have to reduce the double work and costs. SMEs need one trusted “sustainability profile” with all relevant information that they can share with their stakeholders so that they do not have to fill out one reporting template after the other.

We need more cost-effective support that tells SMEs HOW to improve

The goal behind assessing and reporting on sustainability is to see actual improvements. But this is something where it gets really tricky for SMEs. Often they already have a rough idea of what issues might be problematic, but the real challenge lies in changing the status quo. How can they cost-efficiently change? Talking about SMEs we should think of companies with less than 250 employees. This means companies that have limited resources and negotiation power. Changes strongly depend on their partners. For instance, companies might only rent some office space without direct control of the energy supplier, they might construct buildings according to the client’s preference, or they’re manufacturing products that depend on certain materials without sustainable substitutes. Often the margin for change is limited.

But of course, there are things companies can do from tracking their energy usage, procuring sustainably where possible, or changing the way they organize the workplace. And the general momentum is positive. More and more office spaces provide renewable power, more and more construction projects aim for sustainability and new sustainable materials are in development. So increasingly the challenge lies in pointing SMEs to the concrete improvement measures that they can implement and helping them to understand how.

Gladly, there are first helpful self-service resources for SMEs like the SME Climate Hub with many useful resources or pivot with real-life stories of improvement measures. These are great starting points, but they still require SMEs to search for suitable measures. In times when every user of Netflix or Spotify obtains tailor-made content recommendations, it should be possible to do the same for sustainability. Companies should focus on implementing sustainable measures, not research them. Therefore, we need more tailor-made improvement suggestions that fit the specific needs of companies.

Conclusion

The current developments show that sustainability is becoming more and more mandatory for SMEs. So far, SMEs lack the resources and tools to minimize the efforts related to sustainability assessments, reporting and improvement. But the more we can reduce the efforts for SMEs the more we can turn sustainability from a burden to an opportunity that helps SMEs to cut costs, attract talent, obtain funding, and secure customers. Knowing that SMEs are responsible for 50% to 70% of the global GDP helping them is also one of the most important levers to accelerate the sustainable transition of our economies.

Interested in joining the discussion on this topic? Then visit the corresponding Linkedin Article to this blog post.

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