Surath Sengupta, MD Trade and Working Capital Product and Transformation, LBG; Gwynne Master, MD and Head of Trade & Working Capital, LBG
“By understanding the importance of Scope 3 emissions, staying ahead of regulatory trends, taking proactive steps, and leveraging trade finance solutions, SMEs can turn sustainability into a competitive advantage”
“The time to act is now, and with the right approach, SMEs can lead the way in creating a more sustainable global economy”
In today’s interconnected world, SMEs are increasingly part of global supply chains. As we face growing environmental challenges and regulatory pressures, building sustainable and resilient supply chains has become crucial for long-term success. This article explores why decarbonisation is essential, the evolving regulatory landscape, and how trade finance can support the SME journey towards sustainability.
The imperative of decarbonisation and Scope 3 emissions
Decarbonisation is no longer just a buzzword; it’s a business imperative. For SMEs, understanding and addressing Scope 3 emissions – those indirectly produced along the value chain – is particularly crucial.
Why Scope 3 matters:
- It represents the SMEs largest opportunity for environmental impact
- Investors and consumers increasingly demand transparency
- It helps identify risks and opportunities in SME supply chains
- It is a key factor in achieving net-zero targets
By tackling Scope 3 emissions, SMEs are not only reducing their environmental impact but also future proofing their business against upcoming regulations and changing market demands. Moreover, addressing these emissions can lead to operational efficiencies and cost savings.
The evolving regulatory landscape
The regulatory environment around sustainability is rapidly evolving, with a clear trend towards standardisation and increased reporting requirements. For SMEs, staying ahead of these changes is crucial:
- The EU’s Corporate Sustainability Reporting Directive (CSRD) will affect many SMEs from 2026, requiring full oversight of ESG standards in supply chains.1
- Industry-specific regulations are becoming more common, affecting various sectors of the UK economy.
- The Task Force on Climate-related Financial Disclosures (TCFD) recommendations are becoming mandatory for an increasing number of UK SMEs.
- The UK government is developing its own sustainability disclosure requirements, likely to align closely with international standards.2
This trend towards standardisation represents good news for SMEs. It provides clearer guidelines and levels the playing field, making it easier to compete on sustainability credentials. However, it also means that SMEs need to start preparing now to avoid being caught off guard by new requirements.
“Similar to the discussions on Scope 3 emissions, there is a need to consider Just Transition. When thinking about global supply chains, environmental challenges are intertwined with social aspects and hence we need to build an inclusive journey for SMEs in the supply chains to achieve collective progress” – Surath Sengupta, MD Trade and Working Capital Product and Transformation, LBG
Setting up for success
To thrive in this new environment, SMEs should take proactive steps:
- Map the supply chain: Gain a comprehensive understanding of suppliers and their environmental impact. This includes not just direct suppliers, but also their suppliers, providing a full picture of the value chain.3
- Invest in data collection: Accurate emissions data is crucial for reporting and improvement.
- Set targets: Align sustainability goals with global climate objectives. For example, the Science Based Targets initiative (SBTi) provides a framework for setting credible, ambitious targets. 4
- Collaborate with suppliers: Work together to find innovative solutions for reducing emissions. This could involve joint research and development projects, sharing best practices, or co-investing in green technologies. 5
- Communicate transparently: Share progress and challenges with stakeholders. Regular sustainability reports, even if not yet mandatory, can help build trust and demonstrate commitment.
- Embrace technology: Utilise AI, Internet of Things, Machine Learning and other digital tools to track and manage supply chain emissions. Blockchain, for instance, can provide transparent and traceable records of the supply chain’s sustainability performance. 6
- Upskill workforce: Ensure teams have the knowledge and skills to implement and manage sustainable practices. This might involve training programs or hiring specialists.
“In today’s business landscape, sustainable value chains are no longer optional, they are imperative. The key to achieving sustainable supply chains – which contain up to 80% of a company’s carbon footprint – lies in the clarity we can create through standardised measures, scoring, and reporting. By leveraging these elements, businesses can make informed decisions, optimise operations, and create lasting value for all stakeholders by measurably reducing environmental impact.” – Gwynne Master, MD and Head of Trade & Working Capital, LBG
The role of Trade Finance in building sustainable supply chains
In an OECD survey of 350 SMEs globally, 55% of respondents identified a lack of funds as a key reason for limited action on climate change. 7 With this in mind, alongside increasing transparency and availability of data, trade finance banks can be a useful partner to SMEs in their journey towards greater sustainability. Here is how:
- Incentivising sustainable practices: sustainability-linked finance facilities can provide better terms for companies meeting specific environmental targets. Banks can also support the trade of sustainable goods and services. For instance, specific facilities might be available for trade in sustainably produced commodities.
- Improving supply chain resilience: Trade finance solutions like supply chain finance can help smaller suppliers access funding, strengthening the SME’s entire supply chain. This can also be linked to suppliers’ ESG credentials to incentivise improvements in ESG metrics.
- Supporting transition investments: Specialised green trade finance products can help fund the investments needed to transition to more sustainable operations.
Building sustainable and resilient global supply chains is both a challenge and an opportunity for SMEs. By understanding the importance of Scope 3 emissions, staying ahead of regulatory trends, taking proactive steps, and leveraging trade finance solutions, SMEs can turn sustainability into a competitive advantage. This journey is not just about compliance – it’s about securing long-term prosperity in a changing world. The time to act is now, and with the right approach, SMEs can lead the way in creating a more sustainable global economy.
Sources:
1 Council of the European Union – Council adopts directive to delay reporting obligations for certain … https://www.consilium.europa.eu/en/press/press-releases/2024/04/29/council-adopts-directive-to-delay-reporting-obligations-for-certain-sectors-and-third-country-companies/
2 Allianz Global Investors – Power of 3: why Scope 3 emissions matter https://www.allianzgi.com/en/insights/outlook-and-commentary/scope-3-emissions
3 Cambridge Institute for Sustainability Leadership – The path to net zero https://www.cisl.cam.ac.uk/resources/publications/path-net-zero-how-smes-can-lead-way?
4 Science Based Targets Initiative – Ambitious corporate climate action – Science Based Targets Initiative
5 Allianz Global Investors – Power of 3: why Scope 3 emissions matter https://www.allianzgi.com/en/insights/outlook-and-commentary/scope-3-emissions
6 Infosys / Amazon Web Services – How blockchain enables sustainability in supply chains https://www.infosys.com/services/blockchain/documents/enables-sustainability-supply-chains.pdf?utm_source=perplexity
7 Financing SMEs and Entrepreneurs 2024 – OECD https://www.oecd.org/en/publications/2024/03/financing-smes-and-entrepreneurs-2024_015c0c26.html
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