The challenge of sustainability

SME Publications/ SME XPO 2024

Sustainability can be a competitive advantage for SMEs, but they have to work with customers and partners to leverage this

By Malcolm Harrison, Group CEO, CIPS

The challenge of addressing sustainability concerns is the defining issue of our time, and one which touches every person, business, and community on the planet. So far, the conversation has mostly focused on what large corporations should do to reduce their environmental impact. However, this pressure will soon be pushed down the supply chain to SMEs. With both governments and consumers looking for businesses to do more to tackle climate change, it is crucial SMEs act on sustainability concerns to ensure they are ready for the challenges ahead. For many businesses, sustainability can be seen as intimidating, with business owners worrying about the potential costs involved and the idea of having to find new ways of doing things in an already challenging business environment. But in times of great change there are also great opportunities, and the SMEs that embrace sustainability and work with their clients and suppliers to reduce their environmental impact can give themselves a competitive advantage in the marketplace. Not only that, implementing sustainability initiatives also just makes good business sense by increasing cost efficiencies, or mitigating against soaring energy prices through reducing consumption.

Environmental degradation is probably the biggest issue of our time, and large corporates cannot tackle the sustainability crisis on their own. SMEs make up 99.9% of all UK businesses, so even small changes, such as using more environmentally friendly packaging or reducing waste, can have a big impact when rolled out on scale across the business community.

However, how this is achieved will mean something different to each business. Company owners should be looking at which sustainability imperatives are most aligned to their own business values, as well as meeting the requirements of regulation, their customers and their investors, and this depends on their sector too. For example, service-based organisations may be more likely to focus on social value and human rights whilst manufacturers focus on reducing carbon or eliminating waste to land-fill.

Companies must be savvy and realistic about what they can actually influence. SMEs would have to question how much they could contribute to reducing their scope three emissions which is predominantly the responsibility of larger businesses with complex supply chains. Perhaps better to focus and learn about scope one and two which are more immediately under an organisation’s control by managing energy consumption or moving to electric vehicle use.

NFR Reporting

Beyond the direct impact of environmental protection, there will soon be more requirements for SMEs to report on their impact on the environment. This may feel onerous to a smaller operation but data is a key tool for businesses looking to improve on their sustainability credentials. It allows companies and the wider business community to identify where the biggest issues are and to track the impact of improvement initiatives.

Non-financial reporting (NFR) is the regulatory tool being used to report and track environmental data. NFR rules require UK businesses to measure their own emissions, the emissions which occur in their supply chain, and the emissions created by their products. These rules are for the moment aimed at large businesses, and due to the urgency of the need to track emissions throughout the supply chain, NFR requirements are already included in many contracts.

So, SMEs need to be ready for this additional layer of compliance. In the first instance, they should start mapping out their own environmental impact if they haven’t yet done so and put plans in place to ensure they can produce environmental data accurately and in a timely fashion. One way of doing this is to utilise digital systems to do the hard work. The level of regulation around sustainability is only likely to increase in the months and years ahead, so it is an imperative that procurement teams have the necessary systems and skills to manage the data they will have to provide. Acquiring skills in data analytics, or providing training to procurement staff on how to tackle this will mean your business is better prepared when further regulations come into force.

Net Zero Commitments

As well as the need to comply with regulations, larger businesses will also put pressure on their suppliers to provide data and evidence of a reduction in environmental impact. The UK has committed to becoming net zero by 2050 and following this many businesses have set their own net zero pledges to demonstrate their commitment to a sustainable future and their suppliers will play a large part in reaching that goal.

To this end, collaboration is key. It is not helpful for larger businesses to just tell their smaller suppliers to become more sustainable – it is only by working together to find solutions that we will all overcome these challenges and SMEs should be encouraging that level of support from their partners. Businesses should be taking advice from their procurement staff to work out how to meet sustainability goals whether it’s through sourcing more sustainable raw materials, revising product design or creating a circular supply chain. Businesses should be ready to have an open and collaborative conversation on how to get comfortable with these changes and how they will need to adapt.

Don’t rule our collaboration with competitors either. Sharing transport between two businesses, to increasing vehicle utilisation, is another method of reducing overall emissions in the supply chain.

Late or delayed payment is a huge issue for SMEs trying to manage their finances, and it can also mean many SMEs do not have the cash to invest in new sustainability initiatives or to improve their practices. How can an SME invest in more sustainable products or develop recycling practices if it still waiting for the money it is owed by a larger customer? Each buyer should pay all their suppliers promptly and on time to support the drive towards sustainability in SMEs. SMEs can influence this by asking their corporate clients to pay on time and even suggest clauses in contracts to reinforce this behaviour.

Here’s another perspective. With their commitments to becoming net zero, many larger businesses will be looking to work with environmentally friendly suppliers, and so the SMEs that embrace sustainable initiatives now and show they are adept at tracking environmental data will become more appealing to larger businesses who are under pressure to meet environmental commitments. As well as potential customers, investors are also increasingly factoring sustainability into their investment decisions. Demonstrating forward-thinking in this area can make your business more attractive for inward investment as the ESG investment trend continues to grow.

Reputational risk

As well as the positives of attracting new customers and investors, there are reputational risks which come from not acting now on sustainability. Consumers are demanding greater transparency around sustainability, and there is increased scepticism around environmental claims made without the necessary evidence to support them.

At the end of last year, the Competition and Markets Authority (CMA) announced a new crackdown on ‘greenwashing’ and false environmental claims. Then earlier this year the CMA singled out the fashion industry as the first sector it will look at to explore whether customers are being duped into paying more for ‘sustainable’ products that in fact are not what they seem. The CMA has said it will start naming and shaming businesses who are particularly guilty of this and will target other sectors in due course.

While the focus will likely be on larger organisations, the reputational damage for an SME seen to be misleading its customers on sustainability could be severe. Data again plays a key role here. Businesses should look to collect environmental data from suppliers and compare this to regulatory benchmarks to ensure what their suppliers are doing and reporting is realistic. SMEs should ensure that the claims they make in marketing and on packaging are backed up by actions in their supply chains and data to evidence the impacts.

Conclusion

The size and scale of the sustainability challenge can often lead to SMEs delaying action to instead focus on more manageable, immediate problems. However, now is not the time to delay – further regulations and pressure on sustainability are round the corner. SMEs focusing on sustainability can future proof their business and stay one step ahead of competitors. Working collaboratively with customers, suppliers, and even competitors is a key part of protecting our planet and we must take action now.

The Chartered Institute of Procurement & Supply (CIPS) is a United Kingdom-based global professional body working for the purchasing and supply professions. With an objective of “leading excellence in procurement and supply”, it aims to promote good practice and provides services for the benefit of a procurement community of 118,000 members.

SME Publications/ SME XPO 2024