Why Should SMEs Take Action?

Small and medium-sized enterprises (SMEs) make up 90% of all businesses, and more than 50% of employment worldwide. Therefore, it is extremely important that SMEs are able to measure their greenhouse gas emissions, as well as set and meet goals to reduce their emissions.

Obstacles SMEs Face When Taking Climate Action

However, a great portion of the work and progress towards reducing emissions has been driven by high-emitting, major, global companies. Because of this, most of the existing frameworks are suited towards such companies. Not only that, the lack of strong management and strategy systems makes it even more challenging for SMEs to use these frameworks.

Furthermore, due to climate change and the ensuing problems related to it, there is more public pressure than ever on the sustainability of companies, big and small. Considering this, investors are starting to demand sustainability reports from companies. According to a Ernst & Young survey, 74% of investors say they are more likely to divest from companies with poor sustainability practices. In the increasingly competitive market of today, not acting towards sustainability will put companies at a great disadvantage.

This is evident in survey results. According to a survey by SME Climate Hub, two-thirds of SME owners expressed their concern that they do not have the expertise and understanding necessary to address the climate challenge. Also in the same survey, lack of finance (48%), time (40%), and a lack of skills and expertise (68%) are the top factors cited by SMEs for postponing climate action.

The CDP Framework

A non-profit organization for carbon transparency, Carbon Disclosure Project (CDP), has developed a climate disclosure framework for SMEs. The framework not only helps SMEs with climate reporting, but also enables investors to have standardized, comparable data to aid in decision making. In other words, when many SMEs use the same framework to report their climate data, investors will be able to compare and evaluate the sustainability performances of different companies.

The main objectives of this framework for SMEs are to be accessible for all, straightforward, and easy to understand. In line with these objectives, the framework has a modular structure. The greatest advantage of the modular structure is that SMEs can prioritize the modules that are important and pertinent to them. There are three core modules, Measure, Commit, and Action & Impact, as well as four additional modules, Energy Reporting, Value Chain Emissions, Management & Resilience, Climate Solutions. CDP recommends SMEs that adopt this framework should immediately start working on the three core modules, and add the other modules within three years of starting reporting.

Core Modules

Measure, the first of the modules, outlines the minimum disclosure that is asked from SMEs about their emissions in accordance with current standards such as the GHG Protocol. This module asks companies to report the 12-month time frame for which the data is reported, gross global operational emissions, meaning the total Scope 1 and Scope 2 emissions of the company before any deductions are made (e.g. carbon offset, avoided emissions), and calculation methodology. On top of this, CDP highly recommends that companies report their emissions intensity within three years of starting climate reporting, which can be calculated by dividing the gross global operational emissions by an appropriate business metric such as economic output.

The next module, Commit, asks SMEs to report their emission reductions targets and the progress they have made so far. Setting targets is key for climate action, and it shows investors that the company has initiative and a solid environmental strategy. Companies need to provide the year targets are set, target years, as well as how much progress was made in the reporting year. The companies also have to state whether their targets are in line with a known target-setting standard.

Action & Impact, the last of the core modules, focuses on the actions SMEs are taking to meet the targets they committed to, and the effects those have on decreasing emissions. In this module, companies report the initiatives they have implemented to reduce emissions. CDP also asks companies who have not implemented any initiatives yet to provide an explanation.

Additional Modules

Beyond the core modules, the first additional module is Energy Reporting. Most often, this is the greatest source of emission for SMEs, and addressing energy decisions is a crucial step towards reducing emissions. This module asks companies to share their total energy consumption and the proportion of renewable energy sources in their total energy usage..

The second additional module, Value Chain Emissions, focuses on emissions of the companies outside their direct operations. In this module, companies provide data of their gross global (i.e. before any reductions are made) Scope 3 emissions. This includes supply chain emissions such as employee commuting, purchased services, transportation and distribution of the products, and customer related emissions such as processing, use, disposal of the products.

Next is Management & Resilience. To meet their climate targets, companies will benefit from climate action management. As more and more investors ask for information on the companies’ climate strategy and risks, risk management is crucial for SMEs to build business resilience. This module asks companies to disclose if their business plan adheres to the net-zero future goals, as well as state whether if there is a dedicated person for overseeing climate actions.

The last of the additional modules is Climate Solutions, which asks companies for disclosure on their low-carbon products or services that allows third parties to reduce emissions. This would allow SMEs to receive good publicity, as well as gain a competitive edge by attracting investors. For this module, companies report the total revenue from low-carbon products, description of these products, and methodology used to label the products as low-carbon.

Advantages for SMEs

It is recognized that SMEs are the most varied type of businesses, and this variety makes it difficult to develop a universal reporting framework that will both ensure extensive climate reporting and make the process of reporting easier for SMEs. The modular structure aims to address that. Climate reporting using this framework will not only allow companies to gain competitive advantage by luring capital from investors, but also bolster company resilience as more and more environmental regulations are being implemented.

How Could Faradai Sustain Support Your Business?

With our solution Faradai Sustain, we help SMEs in their sustainability transition by addressing all core and additional modules of CDP’s framework. Covering 2000+ activity data including Energy, Waste, Water, Transport, Business Travel and Supply Chain, we provide a comprehensive global coverage for scope 1, 2 & 3 activities measuring direct and indirect emissions.  Businesses can easily set targets in line with the Science Based Target Initiative (SBTi) through the platform, and can see how much and how quickly they need to reduce greenhouse gas (GHG) emissions in order to reach Net Zero targets. We also provide an option to compensate for businesses’ carbon footprint by offering carbon offset projects around the world for the emissions that cannot be removed after all the reduction efforts.

To find out more about how Faradai Sustain addresses SMEs needs and could support your business in sustainability transition start free now on  https://sustain.faradai.ai