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Carrots as well as sticks for greener SMEs

Author: ICAEW Insights

Published: 27 May 2022

IoD says government should set specific goals for SMEs to cut carbon emissions because company directors feel unsupported.

The Institute of Directors (IoD) is urging the government to establish an official carbon emissions monitoring and reporting system for small and medium-sized businesses to encourage them to decarbonise, because there is currently a lack of ‘effective’ financial and non-financial incentives for SMEs to reduce their carbon footprint. 

The IoD, which represents around 20,000 members across all business sectors, says the UK currently lacks a policy framework and incentives to help SMEs so that the UK reaches its goal of net zero by 2050. 

Under the IoD’s proposals, the government should establish reporting, measurement and monitoring tools to incentivise SMEs to cut emissions. Among other things, the IoD suggests the development of a recognised benchmarking scheme for companies to signal their progress on the path to net zero, strong professional pathways for zero carbon advisers, and action to fill reporting gaps such as an energy performance certificate for properties. 

Kitty Ussher, Chief Economist at the IoD, says: “The need for carrots as well as sticks may not have been well thought through. That’s not a criticism but an opportunity. We see our policy paper as a thought leadership idea to put into the public arena.”

According to the IoD report, The Green Incentive: how to put net zero at the heart of business planning, ‘Unless required to by customers or clients attempting to monitor the carbon impact of their own supply chains, doing so may not be a top priority for some small businesses faced with competing short term priorities on their time and resources.’ 

The IoD’s research shows that one in five of its members says the ‘lack of a clear business case to invest in net zero measures’ is one of the biggest obstacles to reducing their carbon footprint. Other major obstacles listed include the absence of financial support and incentives to address climate change, upfront or ongoing costs, and a lack of access to external finance or grants. 

One of the ‘easiest and most impactful’ ways for government to incentivise SMEs would be lower corporation tax rates for companies that demonstrate progress in their operations to net zero.

Ussher says the IoD is keen to work with ICAEW and other accountancy institutes and regulators to debate options to help SMEs, as well as mapping out the best way to reduce emissions without burdensome regulation, and to “flesh out in detail what the operationalisation of this feels like and whether there’s anything that makes it a non-starter”. 

Increasing numbers of non-governmental initiatives such as PlanetMark and BCorp are emerging to help companies measure and report on emissions and sustainability, but there is no official standard to monitor progress, leaving the space wide open for manipulation, incomparability or, worse, inertia.

So far, most of the government’s efforts to encourage decarbonising the economy have, rightly, been concentrated on the biggest polluters. For example, the government requires asset managers and large listed companies to consider and report on their impact on the climate. Commercial landlords and property developers also have to report on emissions for their buildings. But unless concrete efforts are made now to establish metrics, the transition to net zero could fail for the SME sector

“2050 might seem like a long way away but there is a lot to do, and it would be better to glide to net zero rather than jerk there,” Ussher says.

As part of regular meetings with ministers at the Department for Business, Energy and Industrial Strategy, Ussher said the IoD will be putting their policy paper firmly on the agenda. In terms of a timeline, she said it would be a good starting point to have a “direction of travel, and what is needed to make this happen in the next 10-15 years”.

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