Financial Innovation for SME Net Zero Transition

There is no net zero economy without small and medium-sized enterprises (SMEs) transitioning to net zero aligned operations.

Yet only 60 per cent of SMEs have a plan to reach net zero.

They face several barriers that hinder their decarbonisation journey, including lack of knowledge, limited time, and lack of standardised guidance on emissions reporting. Banks and major corporates – those that finance and buy the products and services of SMEs – are well equipped to support SMEs’ net zero action, and with their own net zero commitments, it is essential that they do so.

Barriers to SME net zero action:

• Lack of knowledge
  SMEs often lack knowledge about the net zero transition, especially in emerging markets where the enabling policy environment and push from their customers is less strong. In the UK, 34 per cent of business owners and managers attributed a lack of knowledge as the main barrier to having a sustainability strategy for net zero action.
• Limited time
  SMEs often lack the time to deal with the policy, market, and reporting pressures to reduce their carbon footprint. Time devoted may also not be productive, as SMEs have reported confusion and overwhelm when trying to navigate available decarbonisation guidance.
• Lack of standardised guidance on SME sustainability reporting
  One of the most frequently cited barriers to action by SMEs participating in the research was the lack of standardised guidance on sustainability frameworks for reporting, especially for SMEs at the early stages of their net zero journey.

How can banks and buyers further increase SME net zero action?
The USD 50 trillion net zero financing gap indicates the need for innovation that better delivers on the existing and other yet undefined opportunities to accelerate SME net zero action. To innovate methods to bridge the financing gap, the Banking Environment Initiative (BEI) at CISL and BSR convened relevant individuals from banks, major corporates, financial innovation specialists, and SMEs together for a series of innovation sprints.

Opportunities for banks:

• Raise awareness amongst SMEs of the financial implications, both of opportunities linked to net zero leadership and the costs of inaction.
• Assess the climate-related financial risks of an SME and actively support them to mitigate these risks.
• Reward SMEs via climate standards in their own supply chains, for example, requiring suppliers to report on GHG emissions and/or set reduction targets.
• Develop traditional and non-traditional financial products and services that facilitate and incentivise net zero transitions.
• Connect investors, large corporations, and small business clients with experts that can support the transition of the business, including the provision of tools to measure and report emissions footprints.

Opportunities for buyers:

• Connect SMEs to the practical tools, resources, and vendors needed to enable climate action.
• Reward supplier SMEs taking climate action with better business—e.g., bigger and longer-term contracts and / or a preferential status.

Source: Financial innovation for SME net zero transition.