On May 13, 2024, UK Finance released a new report looking at the challenges SMEs, which are responsible for between 43%-53% of UK greenhouse gas emissions, are facing in the transition to a Net Zero economy.

The report is based on quantitative and qualitative analysis, including interviews with SME leaders. The quantitative research found 48% of SMEs are worried about the impact of increased costs and economic conditions on their businesses, rising to 57% among those who want to reduce their climate impacts.

Dame Teresa Graham DBE, Chair of the UK Finance SME Advisory Group, said: “The transition to Net Zero is one of the greatest challenges we all face. SME business owners are short of time and understandably find it hard to know what needs to be done to decarbonize and how to do it.

Lack of appetite to take major carbon-reducing actions

The research showed appetite among SMEs to take major carbon-reducing actions dropped between 2021 and 2023, from 27% to 19%. Also, there is low willingness to take out more external finance to fund sustainability improvements. 

In the findings, UK Finance heard an important range of views including:

• One independent garage owner in Wales said sustainability is relatively low on his list of priorities while his key business challenges are competing with larger dealer groups and recruiting staff.
• Existing terminology often sounds like buzzwords and incentives to decarbonize are lacking.
• Other SME leaders want to make their businesses more sustainable but lack time or understanding.
• One Scottish cleaning business told us they would like to invest in electric vehicles but are finding the cost prohibitive and would welcome information on funding and grants.

David Postings, Chief Executive of UK Finance, said: “SMEs are a critical part of the transition to Net Zero. Alongside running their businesses in challenging economic conditions, they told us they often feel unable to prioritize action to decarbonise and are overwhelmed or confused by mounting expectations.

More help from banks and government

The report asked businesses what they need from banks, government and others to help them reduce their environmental impact. The messages received were:

• They need help in understanding what needs to be done, with digestible information.
• They need funding help, through a combination of public and private finance.
• They want to see a clear and consistent policy framework to work within.

Report recommendations

The report makes ten recommendations to government, businesses and financial services firms to help overcome the barriers facing SMEs.

To address lack of time, capacity and information

1. Banks: Improve business understanding through a revamped mentoring offering and by convening business networks to share good practice.
2. Government & business: Relaunch the UK Business Climate Hub with improved content and greater publicity.
3. Larger businesses: Provide training, resources and support to help SME suppliers improve their environmental practices.
4. SMEs: Seek advice and support from their financial service providers and/or larger customers, and use the UK Business Climate Hub to map out your sustainability plan.

To ensure finance can respond to SME needs

1. Banks: Produce guides to explain where SME spending on sustainable action makes financial sense and offer financial products to support them.
2. Government and Devolved Administrations: Issue “Help to Green” vouchers of £5,000 ($6269) for SME action.
3. British Business Bank: Use all available funds and schemes, including the new Growth Guarantee Scheme and Start Up Loan Scheme to encourage carbon reduction activity.
4. UK Finance: Support banks and other actors to better support SME action, by facilitating knowledge-sharing and data-gathering.

To address the policy gap

1. Government: Establish a Taskforce to plug the gaps in SME-facing sustainability policy, and help strengthen SME understanding of what is required.
2. Government, Devolved Administrations & LAs: Publish sector-specific regulatory timelines, grounded in a long-term green industrial strategy, so SMEs know how to plan.

Postings said: “Ultimately SMEs lack the time, capacity and access to the right information and funding to help them transition. That’s why we have laid out a series of practical recommendations for government, businesses and financial services to support SMEs through a just transition to a more sustainable economy.”

Dame Teresa Graham said: “The practical recommendations from UK Finance are focused on the barriers that SMEs say prevent them from taking greater sustainability action. Lots of parties have a role to play, including larger businesses who can support their suppliers in the SME community by providing training and resources. Collectively we can all help SMEs through the transition.”