While the majority of family farms in the UK operate as partnerships or sole traders, there is a small proportion by number (but larger by acreage) which have adopted a corporate structure and probably a larger number where distinct areas of the business run as a limited company parallel to the main partnership. Such corporate small-medium enterprises (SMEs) have challenges with the government’s ambitious net-zero target by 2050. While some businesses may take comfort in the distant milestone, SMEs are most immediately faced with disclosing climate-related financial information under the Taskforce on Climate-related Financial Disclosure (TCFD) framework. The government has made this mandatory by 2025. We must remember that there is difference between sustainability, Net Zero & ESG. We talk about the main priority right now – Net Zero.
SMEs remain in the dark on how to transition – this often can sit in the ‘too hard basket’. In June, the UK Climate Change Committee report identified significant gaps for SMEs within the government’s net-zero policy, including the lack of policies supporting energy efficiency in commercial buildings, carbon pricing incentives and decarbonisation. Similarly, SMEs remain ill-prepared to comply with the TCFD framework due to limited resources, lack of guidance and time.
While a recent report by Aldermore highlights that more than half of SMEs have invested in environmental sustainability over the past year, they remain significantly behind when compared to their larger competitors. As climate regulations are often written with larger corporates in mind, SMEs have to play catch up with fewer resources, putting them at a significant disadvantage.
Ahead of the 2025 TCFD enforcement, there are four key areas SMEs should prioritise to begin their net-zero journey:
Understand what net-zero really means:
SMEs must learn what net-zero, specifically the corporate net-zero Science Based Targets initiative (SBTi) means, in order to understand how to reduce scope 1, 2 and 3 greenhouse gas emissions within their business strategy and operations. Scope 1 refers to direct emissions generated from owned or controlled sources, scope 2 covers indirect emissions generated from purchased electricity, steam or heat and scope 3 includes all other indirect emissions that occur in the company’s value chain. Corporate net-zero SBTi is defined as:
- Reducing scope 1, 2 and 3 emissions to zero or to a residual level that is consistent with reaching net-zero emissions at the global or sector level eligible 1.5 degrees aligned pathways
- Neutralising any residual emissions at the net-zero target year and any greenhouse gas (GHG) emissions released into atmosphere thereafter
SMEs can reduce their emissions through internally measuring their carbon footprint, allowing them to set realistic targets that meet SBTi standards and introduce awareness and external training on climate risk, TCFD and scenario analysis. The TCFD framework and scenario analysis is a helpful guide on how to reduce emissions through reporting and assessment. In addition, SMEs can speak to specialists on the best way to reduce emissions and prioritise decarbonisation over emission offsetting.
Carry out a climate risk assessment:
Companies should carry out a climate risk assessment to understand their supply chain, financial and climate-related risks. Doing this will enable firms to produce accurate and complete climate change data that identifies ongoing risks and opportunities, measure total value chain emissions produced and help set up the right financial and operational structure. In addition, the data collected will create clear, transparent and achievable short, medium and long-term targets aimed at reducing carbon emissions that are consistent with net-zero targets.
Challenges surrounding the measurement of long-term data impact, which is currently short-term, can also be addressed through carrying out a climate risk assessment. Long-term data impact refers to the collection of data in order to make informed long-term decisions on climate forecasting. Currently the collection of data is short-term impact. The collection of climate data for SMEs is particularly important given the historical lack of data when it comes to modelling the impact of climate change and quantifying its potential financial impact over a range of different scenarios.
TCFD considerations:
SMEs can prepare ahead of the mandatory 2025 TCFD reporting deadline by integrating and understanding the TCFD framework, including the four pillars (governance, strategy, risk management and metrics & targets). They can also do this by listening and speaking to their competitors, customers and specialists regarding the best ways to integrate the legislation while reducing their carbon emissions.
Scenario analysis is a key part of the TCFD framework and requires companies to create plausible scenarios to test the resilience of their climate strategy. Businesses who struggle to understand how scenario analysis works can create their own scenarios or draw on examples published by the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPCC). SMEs can use a combination of IEA, IPCC and other scenarios together to provide insight into different physical and transition risks. However, SMEs need to be aware that temperature or warming levels can affect scenario analysis. For example, TCFD states that 2 degrees or lower can be used when running tests on different scenarios. Yet the temperature to test remains rather flexible, ranging from 1.5 degrees to 3 degrees and was previously higher. Ultimately, this can affect the results produced under scenario analysis.
Establish scope 3 emissions reporting within supply chains:
SMEs must be vocal with their customers, suppliers and clients on scope 3 emissions disclosures within their supply chain. They must also consider how location-specific risk will impact complex global supply chains. Failure to understand this will cause operational and financial disruption within an SME’s supply chain, both domestically and internationally.
Introducing climate change impact-assessment questionnaires to suppliers and monitoring climate-related risks are just some ways to identify and minimise risks. Questionnaires are an effective way to understand suppliers' climate change practices and a good way to assess suppliers' climate standing among one another. Monitoring the climate-related risks of suppliers can be achieved by having a screening process that assigns identified risks with a score, depending on magnitude and likelihood.
In short, there is much to do and consider for SMEs in response to the government’s net-zero policy and the 2025 TCFD enforcement. It is imperative that corporate SMEs engage with the various ways to reduce their carbon emissions as soon as possible to best position themselves for the years ahead. For some, who are already finding the increasing administrative burden problematic, this may be a tipping point towards disincorporation (where this is feasible). Talk to the experts.
*The views expressed are the author's and not ICAEW's.