How can SMEs start their sustainable transition? by Johan Barros

How can SMEs start their sustainable transition?
by Johan Barros
Policymakers, citizens and consumers, investors and business leaders are taking climate change risks increasingly seriously. This has strong implications for small and medium-sized enterprises (SMEs), which represent over 90% of the European economy and bring between 50% and 60%1 of value added to national economies worldwide. The successful sustainable transition of the economy also depends on SMEs’ efforts.
Society still feels the post-pandemic effects; global supply chains are under considerable strain; geopolitical tensions are rising; and inflation and energy costs are at unusually high levels. SMEs feel the impact of such challenges more strongly than larger companies. SME owners and managers – who are busy with the day-to-day running of their business and often struggle just to keep it afloat – may feel daunted to take time to plan, reflect and invest in their sustainable transition.

To help SMEs and their trusted advisors (such as accountants) with that, Accountancy Europe, – the European sustainable business association – and the European Association of Cooperative Banks (EACB) jointly published, at the end of 2023, new guidance documents.

The first one of these papers outlines five reasons why SMEs should take the sustainable transition seriously. The second one provides five first steps that a SME can take to kickstart their sustainability journey.

The papers were based on interviews with small and medium sized practitioners (SMPs) that are already providing or planning to provide sustainability services for SMEs. They also benefitted from considerable technical input and insights from experts from all three organisations.

The main message of these guidance documents? Just get started!

Why is sustainability important for SMEs?
A lot can be said about the risks of ignoring and not taking action to change a business. It can be even worse for SMEs, however, to miss out on the potential benefits.

Consider, for example, the competitive advantage. SMEs with sustainable business models can expand their range of clients and business partners. This can happen, for example, by being better placed to secure contracts with larger companies who are legally obliged to consider the overall sustainability of their value chains.

two colleagues having a meeting over a cup of tea
Making the business more sustainable can also provide cost savings and efficiency gains.

For example, the costs of investment in a new plant or equipment may be offset by increased energy efficiency, especially at times of skyrocketing energy prices and when grants are available to finance energy-efficient assets.

Sustainability can even affect the business’ succession planning. A sustainable business that is adapted to the needs and realities of the environment is more resilient in the longer term and makes the next younger generation more interested to continue running the family business.

The benefits of positive branding should not be underestimated. Basing a business model around sustainability is more appealing for end-consumers who seek to cut their personal carbon footprint and can improve brand loyalty. This can, in turn, also strengthen the SMEs employee retention and commitment for the business.

Access to finance is another key opportunity. Firstly, sustainable SMEs can increasingly access diverse financing options, including loans, impact investments, and grants earmarked specifically for sustainable initiatives. Additionally, governments, the EU and international organisations actively support sustainable SMEs through funding programs and incentives, further expanding their potential access to capital.

The second positive and more indirect access to finance benefit is that sustainability planning leads to stronger management structure, accounting systems and internal controls. Reporting on these sustainability actions also enhances the SMEs corporate responsibility brand. All of these are factors that make the business more attractive to lenders.

Finally, sustainability goals make businesses focus on long-term strategic planning, instead of short-term results. It renders the business more risk resilient and adaptive, which should also improve their ultimate sale value.

The above are just a few positive examples for SMEs and their advisors to consider. Each of them should be carefully considered from the perspective of the specificities of each SME and their business model.

How can SMEs get started?
What if the SME owner understands the need for and is aware of the benefits of the sustainable transition, but implementation still feels daunting and confusing? There are numerous pieces of legislation, voluntary initiatives, green labels and certificates, different targets, and sometimes very diverse sustainability information requests from the SME’s larger business partners and finance providers.

Some first simple steps, as outlined in Accountancy Europe’s papers, can be done by practically every SME. The best approach is to identify and start with ‘low hanging fruits’, and very simple steps. This is already much better than doing nothing at all.

Reaching out to experts, information points and national associations is one of the very first steps. Could the national SME association or chamber of commerce have resources and support for SMEs? Or could the national accountancy institute have information about local practitioners who support SMEs with sustainability? There is also the chance that the SMEs existing accountant can help or knows of someone within their network who can.

Another crucial step is to reflect on the business’ future vision, a process that can be guided by far-reaching questions, e.g.:

  • Where does the owner see the SME in 5 or 10 years?
  • What about in 20 years?
  • Does the business model contribute to climate objectives?
  • If not, what needs to change?
  • How will the owner get the data to plan and monitor the change?

Many SMEs may be already ‘sitting’ on a lot of sustainability related data without even realising it. Data points such as gas and electricity consumption, material used in the production process, recycling practices, remuneration policies or gender balance should already exist.

Other data points – such as how the SME’s electricity provider’s energy is produced or employee satisfaction – should be relatively easy to obtain.

What about the SMEs value chain? Is the company overly reliant on key customers or suppliers with higher sustainability risks or exposures?

See the paper on five first steps for more insights on how a SME could get started – or how SMEs’ accountants can advise their clients.

What can accountants do?
Naturally, SME owners are very busy and have many things to focus on. The company’s accountant is often the owners’ trusted advisor, helping them with business planning, financials, access to finance, disclosures and more. Accountants are, therefore, well placed to also advise SMEs on their initial sustainability steps and planning.

Additionally, accountants often have a strong network of other experts and professionals to whom they can refer the SME when necessary.

They can, for example, help SMEs communicate with their value chain partners. Most accountants are not environmental engineers or energy experts – but they are experts in legal requirements and business planning.

Johan Barros
Johan Barros
Head of Advocacy,
Accountancy Europe