2023 ended with a bang, in what was a pivotal step that marked “the beginning of the end” for fossil fuels. 2024 continues in the same vein, with carbon accounting taking centre stage as many businesses face their first year of mandatory reporting, in line with new regulations across the EU and US.
For those that are impacted, one of the major focus points will be on how they gain better visibility of their emissions that sit across their supply chain (scope 3). Accurate reporting on scope 3 emissions and demonstration of a meaningful reduction plan will be both critical if businesses are to meet the new regulatory standards.
With 77% of small to medium sized businesses considering themselves part of a wider supply chain, the question is, what will be the impact on them?
Let's delve into the potential impact and explore how these smaller entities can navigate this evolving landscape.
Challenges:
Supply Chain Expectations:
- Larger corporations are increasingly setting stringent sustainability standards for their suppliers. SMEs may face the challenge of aligning their operations with these expectations, possibly leading to operational adjustments and additional costs.
Competitive Pressures:
- SMEs that cannot demonstrate environmentally responsible practices may find it challenging to compete for contracts or gain market access. As sustainability becomes a key differentiator, SMEs must adapt to this changing competitive landscape.
Regulatory Compliance:
- Governments worldwide are pushing for stronger environmental regulations. CSRD, the California Climate Bill and new SEC rulings are driving a lot of the positive momentum around mandatory reporting we have been hoping to see for some time. SMEs in the supply chain will be pressured to comply with these regulations, posing additional challenges for entities with limited resources.
Resource Constraints:
- SMEs may encounter resource constraints, both in terms of finances and expertise, required to measure and report emissions. According to SME climate Hub, one of the top reasons small businesses cite for delaying climate action include a lack of skills and knowledge (63%), funding (48%) and time (40%). Complying with the standards set by larger companies will certainly prove to be resource-intensive.
Opportunities:
New Business Horizons:
- SMEs that swiftly adapt to sustainable practices may find new business opportunities as larger companies seek environmentally responsible suppliers. This shift can open up new markets and partnerships for SMEs with a focus on sustainability.
Innovation Through Collaboration:
- Collaborative efforts between larger businesses and SMEs can foster innovation. Larger corporations may support SMEs in adopting sustainable technologies or practices, creating a culture of innovation within the supply chain.
Shared Resources:
- Larger companies, recognizing the challenges faced by SMEs, may offer resources, tools, or platforms to help them measure and manage Scope 3 emissions. This collaborative approach promotes shared responsibility for sustainability across the supply chain and with 63% of SMEs reporting a lack of skills preventing them from taking action, this collaboration will be critical.
Access to Funding:
- SMEs with strong environmental practices may find it easier to access funding or attract investments, as investors and lenders increasingly focus on sustainability. This could provide a financial boost to SMEs committed to reducing their carbon footprint. According to SME Climate Hub, approximately 70% of SMEs need access to external funds to reduce their emissions faster or at all. However, only one-third of SMEs have been offered a financial incentive to reduce emissions so there are obvious improvements to be made here.
Market Differentiation:
- SMEs successfully measuring and reducing Scope 3 emissions can use this achievement as a point of differentiation. This positions them as environmentally conscious partners, attracting the new era of climate-conscious consumers and business collaborators who prioritize sustainability.
As large businesses intensify their efforts to measure Scope 3 emissions, SMEs find themselves at a crucial juncture. While challenges abound, so do opportunities for those willing to adapt and embrace sustainability. Collaboration, innovation, and shared resources will be essential in navigating the changing landscape, ensuring a harmonious journey toward a more sustainable future for businesses of all sizes.
