By Jay Mitra, Professor of Business Enterprise and Innovation, Essex Business School, University of Essex, and INSME Board Member.
This Issues Paper has been developed for the 2021 INSME Annual Meeting “SMEs as Drivers of a Sustainable Recovery” held in Sofia, Bulgaria. Learn more on the event here.
Climate change and decarbonisation
A central plank in the climate change debate that was roiling in Cop 26 is that of decarbonization. To try and stablise the climate at 1.5 degrees and pursue a “net zero” strategy, by global leaders by 2050, there is a need to deal with the global carbon budget. If there is going to be any remote chance (measured broadly as two in three) of meeting the 1.5 degrees, the ceiling for CO2 emission needs to be fixed at 420 gigatonnes. It is argued that this budget is likely to be exhausted by 2030.This is because by 2030 global fossil fuel production is expected to be 105% higher than the volume necessary to keep to the global warming limit of 1.5 degrees. This data calls for a radically new economic and social scenario for the world’s net zero ambitions to be fulfilled which is being undermined by concerns over rising energy prices. Talks of a global energy crisis, a drop in investment due to shattered confidence among energy investors, inform the narrative of the fossil fuel lobby (Tooze, 2021)[i], which point to the negative externalities such as the rise in food and other prices.
As Tooze[ii] states, the ability to tackle climate change necessitates a call out for the major restructuring of national economies, involving careful planning and strategic economic husbandry, which poses another headache for the vested interest lobby of the larger fossil fuel energy firms and their institutional counterparts. Ironically, the energy crisis has, as expected, a deleterious effect on smaller firms in both the energy sector and in various others dependent on energy supply. Since September 2021, for example, ten small energy firms, heirs to the privatized gas market in the United Kingdom (UK), went into liquidation having been trapped by the vicious convergence of fixed price contracts with millions of consumers and rising gas prices. While SMEs floundered, larger firms picked up the loss-making contracts with government assistance.
The reaction to the upheaval caused by rising energy prices has been predictable. Major private and public players have demanded a “transition investment” in fossil fuel pending development of renewables, ostensibly to help the suffering middle classes whose reliance on lifestyles determined by fossil fuel supplies is more important than the indulgence of the 1% in expensive electric offering or the inevitable penury of the poor.
While the immediate preoccupation of many large energy firms and their counterparts in other sectors is to maintain the fossil fuel status quo, however temporarily, only the overhaul of the economy and society can help to create equitable economic policies and social settlement. This will inevitably include SMEs (and their federations) which suffer disproportionately under the current hegemony of entrenched larger firms and government policies that do not distinguish between the differentiated roles of SMEs and larger firms in generating economic development. With around 90% of all global businesses (approximately 400 million) being SMEs, there is a vital need for policy to support their efforts at sustainability. Much of this can only be accomplished by a calibrated Keynesian largesse with global imperatives built into research and development, subsidies, procurement, immigration, new economy wealth creation and distribution measures, on the one hand, and entrepreneurial actions on the part of the private and public sectors, in cooperation with local communities. This could mean trade-offs between the needs of people and those of industry, especially where millions are dependent on coal, oil, and gas in poorer countries, and occasionally between a lower GDP and accelerated decarbonization. That might be a better option than letting global GDP to fall by 14% if temperatures rise by 2 degrees to 2.6 degrees centigrade.
Wider context – Technology, Digitisation, and the Pandemic
In reflecting on climate change it is imperative that we note the wider context in which climate change issues are being discussed, and where attempts are being made to resolve the problems of what is often referred to as the Age of the Anthropocene. The Anthropocene refers to the essential domination of human endeavour on climate and the environment in our current geological age. While the Earth is 4.5 billion years old, the human species has been around 200,000 years. Although scientists have argued about the chronological measure of the impact on humans on earth it is in approximately the past 60 years that we have witnessed a fundamental change in physical, chemical and biological systems, resulting in carbon dioxide emissions, global warming, ocean acidification, habitat destruction, extinction and widescale natural resource extraction with a permanent and possibly irreversible impact on the earth’s systems, environment, processes and biodiversity.[iii] Humans , as opposed to the mutations and progress of nature, have been directly responsible for this decline in the earth’s capacity for supporting sustainable living and work.
The same period has seen a rapid proliferation in key technologies which have evolved since the dawn of the industrial revolution. Key technologies were used to burn organic carbon in fossil fuels, enabling large-scale production and industrial development. Demand for coal, oil and gas have increased continually at the expense of carbon dioxide emission and the progressive destruction of the environment. SMEs have been central participants in technology-led economic growth which is now being altered again with the growth of digitisation. Technology, especially digitisation will have some of the answers to questions about process and green forms of tooling up of production and distribution activities. Digitisation offers smart solutions to ensure manageable energy flows in the future through, for example, efficient control of international supply chain and logistics flows, road traffic and consumption of energy in private households. Digital power grids and smart meters optimized by artificial intelligence can override the human limitation to manage data and achieve huge savings in costs.
Finally, the context has been made toxic for both the economy and the wider society with the emergence of the SARS-CoV-2 (Covid 19) pandemic and its devastating effects on human life, economic activity, and social engagement. Various arguments have been made about the close association between the emergence of pandemics and negligence over climate and environmental issues. Pandemics and endemics have begun to shape the ‘new normal’ of economic and social life. Needless to state that this has had a disproportionate effect on SMEs, which have not necessarily benefited as much as the larger firms from large scale government support schemes.
2. SMEs and Climate Change
SMEs are affected disproportionately when there is any form of downturn, caused by recessions whether they be part of an economic cycle or by other means as, for example, Brexit. Their overrepresentation in sectors such as wholesale, retail, food, professional and personal services (c 75% of employment), weaker supply chain capabilities, exposure to financial fragility and weak liquidity, and limited capacity for digitization, contribute to disproportionately negative outcomes. Any attempt at recovery or transformation of the economy is, therefore, influenced by considerations about the human and organizational factors in managing the evolutionary process behind climate change, technology development and pandemics. Climate change offers no exceptions.
SMEs are affected by and are deeply concerned about the risks associated with climate change. A few survey results demonstrate a range of concerns. The following table offers a glimpse of the issues which form the agenda of concern among many SMEs.
Table 1: Climate Change Issues of Significance to SMEs
|Issues of Significance||Risk Perception (%)|
|Affected by Climate Change||56 *|
|Well prepared for climate change||27*|
|Downpours and Heavy Rain||22|
|Droughts and severe heat||20|
|Supply change interruptions and higher cost of energy and water + impact of climate extremes on health of employees||14|
|Have a resilience plan||26*|
|Interact with government on climate change||19*|
|Biggest two impacts on SMEs – costs and price of inputs and health||26 and 20 (46 and 30 for SMEs in emerging markets) *|
|Insurance companies should do more to help SMEs to adapt to climate change risks and consequences||79*|
|Climate change as long-term risk||79*|
|Already affected by climate change||59* (66 in emerging markets)|
The stark reality of the picture above has been exacerbated by the advent of the global disease and with no let-up in the effects of climate change. If SMEs see no business opportunities it is possibly because their awareness of the effects on the whole economy is compounded by the constraints of their own unique features centred round ownership, decision-making, accountability, informal organisation structures, limited or vulnerable forms of involvement in supply chains and dependency on large firm contracts. The pandemic’s unsparing attack on human civilization has led, according to the OECD to a 70% to 80% decline in SME revenues since the beginning of the crisis followed by a deleterious effect on business confidence[v] . But the picture is also nuanced in that the Axa Group results show that urban -based SMEs are more confident of new business opportunities (53%). Low levels of interaction with government agencies and support services point to institutional problems affecting SMEs, yet another well-cited problem in the SME literature generally. Consequently, levels of preparation are also on the low side.
3. SMEs and Technology (Digitisation)
If technology, especially digitization, which is at the heart of major technological change affecting businesses, is a potential instrument for tackling climate change, then it is vital to obtain a critical understanding of how well SMEs are equipped technologically and managerially to address the highly complex triple-bind grip on affairs for the foreseeable future. SMEs tend to fall behind in the use of digital tools and technologies with the uptake being approximately 50% of larger firms[vi] . This deficit played out during the height of the crisis in 2020-21 when teleworking arrangements favoured employers and employees in larger firms. In the digitally driven Industry 4.0 scenario, SMEs are best placed with developing niche technologies which make them dependent on larger firms for scaling up those technologies while being beholden to them for survival.
Given the complex set of implications of climate change, technological development (especially digitization) and the pandemic, policy and support measures at both governmental and SME federation level need to reflect a transformational agenda. Climate change and digitisation issues are unlikely to be resolved with a ‘business as usual’ approach tweaked by minor changes to technology uptakes, and business model change, or by policies which are simply aimed at overcoming supply chain, liquidity, and skills barriers.
4. Working Towards Transformation and Business Unusual
4a. Towards a SME-focused Transformation Agenda for Climate Change
Transformation is possible when there is both a willingness for radical change and an absorptive capacity to undertake actions necessary for change. This means an acute awareness of the problems and evidence of preparatory actions to develop capacity. If only one in five small business have committed themselves to a net zero strategy compared to 50% by their larger counterparts, and only 68% do not have a documented energy strategy, then this misalignment needs addressing. Associations such as the Federation of Small Businesses (FSB) in the UK have joined hands with five business groups representing all businesses to commit themselves to a Net Zero UK strategy by 2050 which is underpinned by the five principles of ‘ambition’, ‘accountability’, ‘delivery’, ‘opportunity’ and ‘cost’, reflecting both the concerns and the needs enumerated in Table 1 above.
Government Action Objectives: Mitigation, Adaptation and Envisioning
The OECD 2021 report on post-COVID strategies for SMEs identifies a range of measures to build back better. Many of these measures could be adopted but they need to be arranged along a three-dimensional policy platform to support SMEs – mitigation, adaptation, and envisioning – buttressed by higher level geo-engineering strategies supporting all businesses. Mitigation refers to ex-ante measures to reduce greenhouse gases. To do this they need to consult and work closely with SMEs and their federations. Adaptation suggests reducing economic and societal exposure to the worst excesses of climate change without dealing with underlying causes. But adaptation also embraces tactics for networking among businesses, using knowledge and technology spillover opportunities to support enterprises so that it becomes a collective exercise. Envisioning means developing innovative ideas and their implementation for new types of businesses based on community and citizen compacts, and new forms of financing centred round community and business networks rather than only individual businesses. Mitigation, adaptation, and envisioning involves cultivating human and community-centred programmes that involve medium term objectives for education, training, financial support, and network development. These need to be complemented by resilience planning and strategies at both the environmental and firm levels.
SMEs and their Federations: Simplicity and Practical Solutions
While the government can focus attention on meta level catalyst strategies such as a Green Industrial Revolution and appropriate strategies to incentivize SMEs, the latter and their federations can home in on practical solutions such as reducing plastic usage and waste, switching to renewable energy suppliers turning off lights or moderating their use, introducing carbon literacy training, and planting trees. There is indeed a willingness to act. The Carbon Trust in the UK found that 80% of SMEs were beginning to act on energy efficiency. A list of possible steps that SMEs could take is provided in Appendix 1.
The Urban Factor
It is reckoned that with half of the world’s population residing in cities (projected to rise to two-thirds by 2050), and generally along coastlines, it is anticipated 80% of the climate change adaptation costs (to mitigate problems caused by, for example, extreme heat, flooding and poor housing) during 2010-2050, are likely to be borne by urban agglomerations. As the economic backbone of cities, SMEs are likely to be the most vulnerable to climate disasters. However, they are also best placed to map and design strategies to combat disasters, that could attempt to meet the Sustainable Development Goals (SDGs) agenda of making cities more resilient and fostering innovation. There is no universal solution since there are major differences across developed economies and emerging markets.
4b. Towards a SME Digitisation Strategy for Climate Change
The rapid evolution of digital and other technologies is expected to meet some of the challenges posed by the climate crisis and indeed the worst effects of the COVID 19 pandemic. The main function of digital technologies is to enable SMEs to use their information and those in their networks, to be harnessed as dynamic assets for driving a transformation agenda. Table 2 below provides some illustrations of how digital technology can help generate that agenda .
Table 2: Digital Technologies for Climate Change
|Augmented reality (AR), for example, can view the real-time effect of climate change, such as flooding or heatwaves, and project what could happen without action. The environmental charity Earth Watch, Europe have used AR to build a virtual city to create a new architecture based on simulated nature-based solutions to plan for and manage actual disasters.|
|Edge computing helps to store data at what is referred to as the ‘edge’ of an infrastructure network so that it can stop large volumes of information from being sent over the global network. It does so by running fewer processes in the cloud and shifting the data to local environments, such as an individual user’s computer, and reducing energy requirements. The alternative would be almost unquantifiable use of electricity by all the traffic, storage, and data processes. By reducing bandwidth consumption, it can eventually save energy and the planet.|
|The Internet of Things (IoT) represents a huge network connecting objects or ‘things’, including wearable health monitors, sensors in the refrigerator, communicating satellite navigation systems in cars, and many more. Since 2020, there have been over 26 billion connected devices. What IoT does is to play a key role by collecting data from sensors and connected products and devices, which can be used to reduce the human footprint, waste, and CO2 emissions. According to Ericsson, the use of IoT has the potential to reduce emissions by as much as 63.5 gigatons by 2030 and all industrial sectors should participate.|
A poll entitled ‘Digitising Europe Pulse’ carried out across 13 EU member states by the Vodaphone Institute indicates that the majority of Europeans consider that digital technology can help to solve the problems emanating from climate change, and that the willingness to share costs for that is acknowledged by 72% of the same sample.[vii]
SMEs, and especially start-ups are beginning to emerge as important providers of solutions to climate change issues through the use of digital technologies. Take the example of a start-up which has developed a platform that maps exisiting technical and scientific capabilities to reach the UN’s SDGs using keywords and other variables. Users apply these keywords to search for knowledge about a specific topic and look for syrnegies in their area of interest, and the materials they use . Another uses AI and an IoT system to report on waste types and amounts to make waste collection efficient and effective. A third sets up greenhouses on the rooftops of commercial buildings using excess energy and waste as inputs. They provide fish and vegetables for usage or product in supermarkets and other commercial buildings. Another example is that of a mobile and web application that provides recyclable information on products and packaging to end-users with an integrated reward system. Examples abound, demonstrating the fertile niche territories that start-up SMEs occupy in their quest for digitial solutions for climate change.
The work of disparate, individual SMEs can be leveraged and enhanced through clear, innovative strategies, such as the idea and practice of the circular economy.
The Digitised, Circular Economy
The circular economy model offers an alternative to the current linear model of ‘take, make and dispose’ where consumption and its corollary, waste, is king. The circular economy alternative aims to maximise asset utilization, generate multiple value loops in supply chains and extend product life. It has been suggested that EU industry CO2 emissions can be cut by 56%” by adopting circular business models. The shift from linear models of the past to the adoption of new digital technologies fosters innovation and scaling up possibilities, yielding zero waste, enhanced productivity, and a net zero-carbon future. For the circular, digitally driven economy to work there are both policy and demand led agendas that need to be understood and adopted.[viii]
There are serious implications for both policy and industry not least because the transformation here is best served if policy makers and SME federations could work together to design and implement strategies that are not simply handed down from government to industry and then consumers as part of a traditional linear value chain. The circular economy informed by digitisation needs real-time infrastructure to meet real-time challenges which can be best created in networked based models of policy and practice supported by ex-ante measures of change. This is best accomplished at local/regional levels through the adoption of community compacts for ideas generation, validation, decision making and evaluation. Digital technologies make that possible. However, certain conditions need to be met.
Conditions for transformation to a digitized circular economy and community compact
The transformation agenda offering of the circular economy is dependent on five key conditions – technology, the marketplace, skills and knowledge, policy and community embedding. Each of these key conditions is governed by important considerations
All firms operate within institutional, regulatory, and political frameworks. This has implications for SMEs and start-ups. It is argued that a circular model might help to increase capital flows and better public appreciation. Where the political agenda incorporates ideas of the circular economy, as in Northern Europe, there is a greater chance for both firms and the public to benefit from its adoption. Against that there are the perennial problems of rigid regulations, inflexible public procurement measures and complex documentation needs. New climate change businesses (existing or start-ups) will inevitably require innovative policy making as evinced in the EU’s promotion of looping of materials through waste regulations, and in the use of supply chains. An underpinning issue is that of public networks that can accommodate the ever-increasing speed and volume of data transmission which needs addressing through the possible amalgamation or synergy of public and new private networks, especially at the local level.
Digital technology advantages are being built into a number of start-ups’ operations, including both hardware and software. An important consideration here is the adoption of existing web-based platforms for the sale of products and services. By enabling firms to focus on existing solutions, firms can concentrate on business development. A related consideration is the identification and development of data points to support collection, retrieval, interpretation and use of data. What hinders data use is lack of access, interoperability problems, and the absence of data standards.
The effective functioning of the marketplace for digitization and the circular economy is dependent on market behaviour. Consumers need to be weaned off consumption driven actions and offered the benefits of recycling. The corresponding element for firms is to ensure that they do not run away with the technologies and an abundance of innovation for which the market may not be ready. Market behaviour is inevitably conditioned by prices, the quality and convenience of products which also need subsidizing especially in the early years of new green firms.
The real application of digital technologies to a circular economy agenda, in terms of increasing value retention, increasing productivity, and enabling efficiency, transparency and convenience, is in its infancy. The availability of both technical and managerial skills based on interdisciplinarity is higher than those of silo-based technological skills. The organization of a skills offering coupled with adequate financing of such provision is a major consideration for both governments and support services.
5. Conclusion and Looking Ahead
Climate change, the pandemic and digitisation form part of a complex set of issues which affect SMEs as the largest constituency of all businesses. The specific urgency of climate change and the need to find immediate solutions compounded by the pandemic, relies in great part on technology and especially digital technologies. Critical to the search for solutions is access to quick, usable, and large volumes of data which can be harnessed, mixed, and used in a variety of ways, sometimes in real-time. Digital technologies enable that to happen. The application of digital processes to climate change agendas needs, however, a pronounced effort on the part of governments, SME federations and support services to develop new forms of public-private- community compacts. The vastness and complexity of the problems needs global strategies at the meta level, but locally centred solutions involving multiple stakeholders of which citizens need to play a central part in enabling implementation of practical solutions to tangible problems at regional and local levels. SMEs working with citizens in the community can be main drivers of innovative climate change actions leveraging the resources of larger firms and the public muscle of governments, as part of a wider ecosystem of connected stakeholders.
Appendix 1: What Practical Steps Can SMEs and their federations Take
Start with a Small Sustainability Agenda: Consider ‘low-hanging fruits’ such as:
- Adopting a firm wide policy for switching off computers after work (50 computers can emit enough carbon dioxide to fill a double decker bus!)
- Benchmarking carbon emissions against other SMEs in the country, in specific sectors and in the regions.
- Selecting appropriate vehicles – abandoning diesel fleet cars and using government grants and tax incentives to purchase electric vehicles (EVs).
- Installing smart meters to collect real-time data on energy usage and move operations to smarter, energy-efficient levels.
- Investing in renewables – considering installing solar panels, generating own power, reducing environmental impact and revenue from that process (possibly best achieved collectively)
- Buying into carbon offsetting initiatives that can help to reduce carbon footprint and educate others.
- Working with financial services, and specifically with Insurance companies to identify climate risk scores and mitigation plans.
 Geo-engineering refers to large scale government interventions such as the Solar Radiation Management (SRM) techniques and the Carbon Dioxide Removal (CDR) schemes aiming to reflect part of the sun’s energy back into space and removing carbon dioxide from the atmosphere, respectively.
 Examples include promoting drought-resistant crops, raising the level of dykes, new building and construction codes, efficient use of scarce resources, such as water.
 These examples are drawn from the Climate-KIC report: Climate -KIC Digitalisation- unlocking the potential of the circular economy. Climate KIC supported by the EIT, a body of the European Union
[i] Tooze, A. (2021). The wild ride to come: Why the Energy Crisis is both a threat and an opportunity. New Statesman, 29 October – 4 November 2021, Pgs. 28-31
[ii] Tooze. A. (2021) Shutdown: How Covid Shook the World’s Economy. London: Allen Lane; Penguin Books
[iii] Natural History Museum (u.d.) What is the Anthropocene and why does it matter? Katie Pavid. National History Museum, UK. (Available on https://www.nhm.ac.uk/discover/what-is-the-anthropocene.html. Last retrieved on 4 December 2021. London. The Natural History Museum
[iv] The Zurich Insurance Group (2016) Potential effect on business of small and medium enterprises (SMEs) due to climate change in 2016. Global survey report. November 2016 The survey polled 2,600 C-suite executives and managers at SMEs in 13 countries in Europe, the Americas and Asia Pacific (available on file:///C:/Users/44780/Downloads/Biggest%20climate%20risks%202016.pdf). Last retrieved on 3 December 2021 Penn Schoen Berland cited in Axa Group . Business Unusual: Why Climate Change is changing the rules of Cities and SMEs. Paris: Axa Group with The UNEP FI Principles for Sustainable Insurance Initiative, Geneva Switzerland
[v] OECD (2021) One year of SME entrepreneurship policy responses to COVID-19: Lessons learned for going forward. Centre for Entrepreneurship, SMEs, Regions and Cities, Organisation for Economic Cooperation and Development. Paris. OECD1). One year of SME entrepreneurship policy responses to COVID-19: Lessons learned for going forward
[vi] OECD (2020). Digital business diagnostic tools for SMEs and entrepreneurship: A review of international policy experiences. Organisation for Economic Cooperation and Development. Paris: OECD. (Available on: https://www.oecd-ilibrary.org/economics/digital-business-diagnostic-tools-for-smes-and-entrepreneurship_516bdf9c-en) n
[vii] Vodaphone Institute (2020). Climate Change: Majority in the EU sees digitization as part of the solution. Vodaphone Institute for Society and Communications. Berlin. Vodaphone Institute. October. (Available onhttps://www.prnewswire.co.uk/news-releases/climate-change-majority-in-the-eu-sees-digitisation-as-part-of-the-solution-813079709.html). Last retrieved on 2 December 2021
[viii] Climate -KIC Digitalisation- unlocking the potential of the circular economy. Climate KIC supported by the EIT, a body of the European Union.