SMEs Going Green in a Post Covid World
Small and Medium Enterprises (SMEs) play a major role in most economies. According to Word Bank, they represent more than 50% of employment worldwide and contribute up to 40% of national income (GDP). In the UK, SMEs account for 99.9% of the business population, three fifths of the employment, and around half of turnover. Because of their contribution, helping SMEs to recover after the pandemic is one of the priorities of the governments all over the world. However, unlike previous crises, this time, the recovery process of SMEs needs to consider elements of a green economy to achieve a green economy by 2050. Meanwhile, SMEs that account for more than 95% of the private sector all around the world, are the main driver of green values and green practices in their local community. In a previous blog, Anastasia Ri has shown that there will be no Net-Zero without the participation of SMEs.
Against this backdrop, we ask a question, do SMEs want to go green and why? Smaller firms are usually less engaged in green-oriented activities and practices, citing the lack of resources such as financial constraints. However, some research suggests that green engagement is more an issue of entrepreneurs’ perceptions and motivations rather than capability.
Investigating BEEPS – a comprehensive survey of more than 22,000 SMEs in 41 (mostly developing) countries, we see that only around 39% of surveyed firms engage with some green practices in doing their businesses. A similar number is found in the UK, with 34% having introduced measuring and monitoring of their environmental impact, and only 7% are already Net-Zero. A closer look reveals that many firms go green because of extrinsic pressures such as requirements from the governments, supply chain, and customers. The literature suggests that this is due to their limited resources and capacity. However, is it simply an issue of inability or indifference?
As we are just coming out of the Covid-19 pandemic, SMEs focus is on survival and recovery and are reluctant to invest in the green transition. In a recent UK SMEs survey, only 4.3% of surveyed firms say that reducing environmental impacts are their priority after Covid. Meanwhile, the three most selected priorities are: to focus on survival (28.6%), increase product quality (23.2%), and introduce new products (19.5%).
For firms that prioritise green practices, the reasons they provided are, surprisingly, have little relation to their businesses. The most cited cause for firms to prioritise green practices is “good for the next generations”. These initial findings suggest that most SMEs still do not go green because they see no clear benefit from this process. Only a small number of them go green to pursue societal values, and others do so simply to meet the requirements of external stakeholders (e.g., the government and customers).
While going green has some benefits, such as enhancing reputation and brand image, these paybacks usually come with substantial costs, including marketing and advertising on top of the costs of going green. In our on-going project, our initial findings show that the green transition process may also bring about substantial “internal” benefits, such as enhanced innovativeness capacity (both products and processes). More interestingly, we find that firms will become more innovative even when they are “forced” to go green. Conventional wisdom suggests that firms that go green because of intrinsic motivation should be more innovative because they are more active in searching for new ways of doing (greener) business as means to accomplish their green values. Meanwhile, firms that go green because of extrinsic pressures may be inclined to complete the green tasks with minimum investment and effort. The reason is that they go green simply to achieve legitimacy. However, examining the BEEPS dataset of more than 22,000 small businesses in 41 countries, once again, we find that firms going green due to extrinsic pressures are equally as innovative as firms going green due to intrinsic motivation (self-motivated).
Another “internal” benefit of going green that we identify through our research is enhanced ability of identifying growth opportunities. Specifically, firms going green are in a stronger position to achieve better growth compared to those that do not. The reason is not only that they are more innovative but also they can figure out some opportunities during the transition process by accumulating new knowledge (about green production/green management). This allows them to connect seemingly unrelated dots and identify new market gaps. Moreover, by re-organising their operations/management to incorporate green values, firms can improve their organisational structure and protocol, reduce waste, and enhance efficiency. These also lead to better chances to grow.
Post pandemic, we are in a critical time to initiate green practices in SMEs. As we know going green brings in benefits in terms of innovation and growth, there is a need to communicate this to the SMEs. All stakeholders, including academics, policymakers and the media should join hands together in this movement.