A4S Sustainability for SMEs

Who is this guide for?
This guide is for those who own or work in Small and Medium sized Enterprises (SMEs), and those small and medium sized practitioners that advise them, who would like to know more about sustainability and how it impacts the business.
 
We have all heard lots about climate change and energy efficiency in recent years – but how familiar are you with these and other issues such as net zero and the Sustainable Development Goals (SDGs)? How do all these terms relate to running a business in difficult times? What, if anything, has all this to do with small businesses? The aim of this guide is to help you, as an SME owner, employee or advisor, to see how the business fits in to this agenda, and to help you source information about how awareness of sustainability issues can benefit you and the business.
 
Why is this important for your business and why do you need to know this?
In most countries, SMEs make up the great majority of businesses and contribute to both the creation of jobs and the economy. They represent about 90% of businesses and more than 50% of employment worldwide[1]. Collectively, therefore, SMEs have a significant impact on both the environment and society.
 
With governments setting new and ambitious targets and policies for achieving an economy no longer reliant on fossil fuels and transitioning to a more sustainable economy, the SME sector is seen as key to making real progress in this area. Accordingly, engaging with SMEs to help achieve national policy goals of sustainable development is crucial for any government, since SMEs are critical to fully addressing the environmental and social challenges we are currently facing.
 
What does this guide aim to do?
This guide aims to introduce the sustainability agenda to those SME owners, employees and advisors that want a deeper understanding of how it relates to the business and how they might seize opportunities from it long term. It outlines how sustainability issues are already affecting supply chain management, especially in relation to the expectations that SMEs are increasingly called upon to meet, how it can contribute to the reduction of business risk, and how it is affecting the all-important issue of accessing finance. This guide also shows how support can be provided to SMEs from professional accountants and other external experts. On all these issues signposting is given to further resources where more detailed information can be found.

[1] https://www.worldbank.org/en/topic/smefinance

Stakeholder demands for environmentally-conscious and sustainable business practices and products are increasing. Customers, employees, local communities and other stakeholders are now seeking higher standards and commitments to sustainability from all businesses, including those in the SME sector.
 
Businesses know that they must always be aware of changes in the tastes and expectations of their stakeholders and adapt accordingly. Planning and switching to more sustainable business practices may reduce costs and make operations more resilient in the long run. It may also attract more business and loyalty by aligning with customer values, as well as enhancing their reputation within the local community and attracting potential employees keen to be associated with a business with strong values and purpose.

In addition, if your SME does business with larger companies and public bodies (or aims to), you will likely find that you are expected to demonstrate the steps you are taking to incorporate sustainability measures into your business practices, as this is formally assessed during their procurement process. This also applies to doing business with banks and external sources of finance (see section X).
 
Innovation and SMEs
Innovation is the process of value creation, an application of original thinking to the development of products and services that customers will want to buy. SMEs may not have the economies of scale that larger businesses have, but on the other hand they will often be more agile and receptive to new ways of working, especially in areas such as branding, marketing and product development. SMEs may have an advantage when consumer trends, markets or regulation dictate that business practices need to transform.  Many SMEs have proved during and after the Covid pandemic that they are nimble enough to innovate and adapt to changing circumstances. Moving to more sustainable business practices is similar and presents a significant opportunity for SMEs to think creatively. The emerging landscape in sustainability should therefore be seen as one that presents new opportunities for all businesses, including SMEs, to increase revenues and profitability by adapting the ways in which they go about winning business and planning their work.
 
What is the value add?
Like any business owner, you need to be clear about how investment in new ways of working can impact on your bottom line. The added value from embedding sustainability into your core business practices can include:
 
·         enhancing your chances of doing business with the increasing number of companies and public bodies that are either required by law to comply with specified standards of sustainability management or have chosen to adopt them, and seek suppliers who can demonstrate similar work practices.
·         focusing on how to reduce waste in your operations and production processes and thereby save on outgoings
·         providing a basis for thinking about how you and your staff can work more efficiently together
·         attracting customers who appreciate environmentally responsible practices on the part of businesses and thus gain a competitive advantage
·         involving your employees in decisions about how to become more sustainable as a business which in turn boosts morale and help improves job satisfaction.
 
Thus, the encouragement to factor in sustainable working practices to your business model can come from a number of sources. As explained above, participation in a supply chain will normally require a commitment to incorporate certain practices that are mandated by the company at the head of the chain. But you should also bear in mind other key stakeholders – your existing customers, your potential customers, providers of finance, not forgetting your employees, who may well have helpful ideas for how things can be done in ways that are not only more socially and environmentally-conscious, but also more efficient. Also, if you have external professional advisors, such as a professional accountant, they will be in a position to offer their own expert advice on steps you might take to add value to your business (see Accountants and the Sustainability Agenda).

We live in an inter-connected world that is highly dependent on global supply chains, which can, and frequently do, involve both large and small businesses.
 
Many SMEs provide goods or services to individual consumers and other SMEs. Many will also have customers that are larger companies or public bodies. Whether an SME has just one large customer or several of them, ensuring that the customer or customers remain satisfied will invariably amount to an important part of the business plan of the SME supplier. This will be especially true if the SME in question is heavily reliant on the business provided by one large customer. Accordingly, SMEs that become part of supply chains need to take great care to ensure that they remain aware of what their customers expect of them and that they continue to deliver.
 
Large companies are increasingly recognising that the success of their sustainability strategy is reliant upon their supply chain. They are having to comply with increasing levels of sustainability-related requirements, including having to report publicly on their sustainability policies, impacts and performance. With this increasing spotlight on progress and transparency, large companies are becoming more closely involved with their supply chains in order to enhance their resilience. Higher sustainability expectations are being set by those at the top of the chain to ensure that there is alignment between their own commitments and the sustainability practices of businesses in their supply chains.
 
How do investors impact on me if I don’t have any?
Investors will often have an indirect impact on businesses further down the chain of the company they directly invest in. Many investors in large companies are saying they want more information to be disclosed about the practices of the suppliers who contract to provide goods or services to the company. This is simply to minimize risk: if there is a disconnect between the practices of the large company concerned and those of its suppliers, the credibility of the large company’s commitment may be undermined and called into question. To reduce this risk and maintain investor interest, some large companies produce supplier sustainability codes which they require their suppliers to sign up to and implement as a condition of doing business.
 
These trends have significant implications for the very many SMEs that provide goods or services to larger companies and public bodies. SMEs must be prepared to have their sustainability practices scrutinised by organizations higher up the supply chain, be prepared to be open about their operations and willing to make changes if necessary in order to be able to continue working with those organizations.
 
Effective supply chain management
It follows that those SMEs that currently form part of supply chains will already be aware of the impact of sustainability concerns on the way they do business. For those that aspire to contract with larger firms and public bodies, it is very much in their commercial interests to start thinking about how they might be impacted by these issues and work pro-actively to address them, so as to make themselves more attractive to these organizations.
 
From the perspective of organizations at the top of chains, effective supply chain management can help mitigate disruption, improve efficiencies, increase customer satisfaction and enhance competitiveness. From the perspective of SMEs, showing yourself to be a reliable and supportive partner helps to consolidate the business relationship for mutual benefit.
 
Even if your business is not currently obliged to sign up to a customised supplier sustainability code, you should consider adopting a recognised sustainability standard, which could help you gain a competitive advantage. Also consider recording the impacts of changes in a way which can explain succinctly to companies higher up the chain how you are performing. Focusing on sustainable business practices in your own supply chain can also drive positive change within your business.
 

Start a conversation with your employees on why sustainability issues are important for the viability of the business, and seek their support. Measuring your sustainability impacts is key, since it provides evidence of your sustainability activity. This may be helpful when trying to attract new customers, retain staff, or when you are considering becoming part of a supply chain. Include your employees to create or update the business plan to include capturing reliable data to provide accurate, timely, relevant and comparable sustainability information. Your accountant or an external professional advisor can help you in taking these steps (see Accountants and the Sustainability Agenda).
 
What to measure will vary for each business but could include the following:


Environmental: Environmental issues examine how a business performs as a steward of the natural environment. Measuring greenhouse gas (GHG) emissions as part of a wider energy management plan, managing waste and water consumption will all improve resource efficiencies. Meters could be installed to measure these which will help document improvements and start initiatives to save energy and reduce waste and water usage, which may enable you to reduce costs and improve profits while reducing carbon emissions.


Social: Social issues look at how the business treats people and the society in which it operates. Identify where improvements can be made, including measuring the wellbeing and diversity of employees, securing customer loyalty and maintaining decent staff working conditions all contribute to enhancing your social impact.



Governance: Place sustainability front and center of your business agenda, develop and update policies and practices as part of this, and review your procurement processes.