New research suggests South African small and medium-sized enterprises (SMEs) are responsible for 13% of non-household/business emissions. That might sound like a drop in the ocean compared with the carbon emissions of bigger businesses, but SMEs support millions of jobs and are significant contributors to the GDP, which puts them in a powerful position. They need help though, to flex their muscles.

Commissioned by Sage in partnership with Oxford Economics and the International Chamber of Commerce (ICC), the SME Climate Impact Report was launched on Friday, ahead of the United Nations Climate Change Conference, or COP27, which runs until 18 November in Sharm el-Sheikh, Egypt.

The report calls on the government and policymakers to help South African SMEs become more sustainable, given the vital role they play in the economy.

Modelling the climate impact of SMEs using the Oxford Economics Global Sustainability Model as well as survey data of more than 2,000 SA and 2,000 UK SMEs, the report revealed SA SMEs’ greenhouse gas (GHG) emissions totalled about 61 million tonnes of CO2e in 2021, which is 13% of SA’s GHG emissions of 479 million tonnes of CO2e. SMEs’ carbon footprint totalled almost a third of business emissions in SA (when GHGs generated in their supply chains are considered).

The research is an overview of SMEs in the UK and South Africa — one in the Global South and one in the Global North — to assess the impact and complexity of climate change in different social, political and economic conditions.

The results exclude much of the agriculture sector because it encompasses many informal and unregistered businesses that are difficult to track, although these SMEs are responsible for a substantial share of methane and nitrous oxide emissions, from livestock and fertiliser use.

SMEs are at the heart of economies around the world, delivering goods and services, while providing employment to a significant proportion of workers. They play a pivotal role in driving economic growth and stimulating development, innovation and competitiveness. The World Bank says that in emerging markets, SMEs generate seven out of 10 jobs and contribute up to 40% of national income.

Government support

They can make a big difference in the fight towards a cleaner and greener future, by reducing the impact of their own operations and by reducing the impacts generated in their supply chains, but SMEs need support from their governments and big businesses.

In the UK, SMEs account for 50% of the country’s gross value added (a productivity metric that measures the contribution of an entity to an economy), compared with 40% in South Africa. SMEs contributed R2.1-trillion to SA’s GDP in 2021 and supported 6.2 million jobs; while in the UK, they contributed £1-trillion (R20.4-trillion) and supported 18.2 million jobs.

The smaller share of the economy that SMEs make up in SA when compared with the UK may be explained in part by the difference in how they are defined. In the UK, all companies with fewer than 250 employees are defined as SMEs, while in SA, this definition includes income thresholds, above which firms are no longer considered SMEs.

SA also has a higher share of SMEs operating in the informal economy, which would not be picked up in official statistics, potentially distorting the data.

Climate impacts

Focusing on the climate impacts, the results show SMEs contribute a lower share of emissions relative to their contributions to GDP and employment. SMEs have a significant climate impact, in particular, greenhouse gases: In the UK, SMEs contribute 160 million tonnes, which is the equivalent of 40% of total business emissions, while in SA, they produce 63 million tonnes or 14% of total non-household emissions.

The highest emitting subsectors, including utilities and heavy manufacturing, are dominated by larger companies, meaning that SMEs tend to cluster in lower-emitting subsectors, subsequently constituting a smaller, but still significant, share of emissions, which is especially the case in SA, where emissions are more concentrated in specific sectors where SMEs are rarely involved, such as in heavy industry.

Half of business emissions come from the utilities sector (largely because of its significant coal-based electricity generation), even though SMEs comprise only 10% of that sector, meaning the lower emissions intensity of SMEs is largely explained by the sectors they are in, rather than their relative performance against large businesses in the same sector.

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This, the report says, highlights that while attention has focused on large businesses in high-emitting sectors, more focus should be placed on supporting SMEs across all sectors as there are considerable emissions reductions that can be made by doing so, which are not always apparent.

Evidence from the UK suggests SMEs spend comparatively more than large companies on energy purchases, which increases the relative size of their emissions footprint. SMEs can therefore be more emissions-intensive than larger companies when operating in similar industries.

Reducing the emissions associated with purchased energy (or ‘Scope 2’ emissions) would therefore have a proportionally greater impact on SMEs than large businesses in helping them to improve their climate impact.

SMEs furthermore generate economic and climate impact through their supply chains (‘Scope 3’ upstream impacts).

Once Scope 2 and Scope 3 emissions are accounted for, SMEs’ footprint totalled 63% of business emissions in the UK and 29% in SA.

Challenges

SMEs want to be more sustainable, but face specific challenges and will require support. Sustainability is already a priority or central to what they do and fewer than one in 10 reported not having thought about it. However, medium-sized firms are more likely than small firms to see it as important and to have a sustainability plan in place. Reducing costs, by lowering energy consumption, is a key motivation, although there was also a recognition that it was the right thing to do. SMEs are already taking steps such as reducing waste and energy use, as well as purchasing recycled or reused products and digitising to use fewer resources.

Cash flow, to fund investments in sustainability, remains an issue, especially for smaller enterprises, as is navigating government policies, difficulty when trying to measure their impact, and attempting to influence their suppliers to become more sustainable.

Technology has an important role to play in measuring and monitoring environmental performance, as well as in facilitating the distribution of information and knowledge about how to be more sustainable. SMEs also want government support, especially through guidance on how to engage with their suppliers to encourage them to be more sustainable, financial incentives, and carbon pricing systems.

The ICC and Sage are calling on the government to help level the playing field for SMEs by:

• Simplifying climate regulation and carbon reporting in a way that’s proportional for SMEs;
• Removing international trade barriers that inhibit SMEs’ ability to purchase or sell sustainable products or services;
• Providing guidance and digital tools to enable SMEs to set, measure and achieve environmental targets;
• Enabling greater access to and understanding of the data on SMEs’ environmental footprints; and
• Subsidising investments to support SMEs to take more ambitious climate action and invest in climate tech.

Previous Sage research found that 90% of SMEs face significant barriers to taking climate action, including cash flow constraints, difficulty navigating government policies and measuring impact, and influencing their suppliers to become more sustainable.

While eager to address their climate impact, not only to reduce their emissions and use sustainable resources but also to help them weather inflationary pressures, SMEs simply don’t have the same resources at their disposal, says Pieter Bensch, MD and executive vice-president, Sage Africa and Middle East.

“Big business, government, lawmakers, and other stakeholders should provide support specific to SMEs to help them reach their potential,” Bensch said.

Elisa Moscolin, executive vice-president for sustainability and foundation at Sage, says the overall climate footprint of SMEs shows just how vital they are to tackling climate change.

“There is an urgent need to help them understand their emissions and arm them with guidance so they can formulate their sustainability plans.

“The good news is that South African SMEs already recognise the importance and urgency of becoming more environmentally friendly. The South African government is responsible for levelling the environmental playing field for SMEs in the race to a net-zero society,” Moscolin said. DM/BM/OBP