Rising costs hampering sustainability progress

The latest edition of NatWest bank’s Sustainable Business Tracker[i] has found that UK SMEs are being swayed from enacting sustainability initiatives by the threat of rising business expenses. The latest quarterly edition of the research, covering Q4 2023, found that 35% of UK SMEs viewed sustainability action as a high priority for the next twelve months, down from 36% in Q3 2023, making it the joint-lowest score since the survey began in 2020.  NatWest noted that many survey respondents commented on the need to focus on rising business expenses given expectations of challenging economic conditions in the coming months. In contrast, the proportion of large enterprises citing sustainability action as a high priority rose notably, from 59% in Q3 to 64% in Q4.

However, positive signs emerged in terms of SME business activity, with the tracker showing that in December this had expanded at the fastest rate for seven months, led by renewed growth in the service economy. The NatWest SME PMI Business Activity Index registered 51.2 in December last year, up from 50.7 in November making it the highest reading since May 2023.

Sebastian Burnside, NatWest Chief Economist, said:

“Small businesses are starting 2024 on a positive footing with confidence getting back to pre-energy crisis highs. Costs are clearly a concern and rising wages, especially the national minimum wage, means businesses are going to be working hard to find efficiencies this year. That may mean sustainability initiatives slide down the priority list for some, but investments in energy efficiency will make even more sense for others.”[ii]

He added that expected interest rate cuts in the UK may also help lower financing costs.

SMEs outline their obstacles to sustainability goals

As part of NatWest’s latest research, SMEs were asked to identify the obstacles they face in becoming sustainable in 2024. As noted in the previous section, rising business costs were seen as the major barrier in improving sustainability credentials with six-in-ten SMEs naming this as the largest obstacle. This was followed by the inability for SMEs to accurately measure their carbon footprint, a barrier identified by 31% of all respondents. The study notes that several companies reported challenges in obtaining information on carbon emissions from their suppliers- particularly those based overseas. Other barriers identified included a lack of customer demand for more sustainable products (26% of all SMEs) and difficulties in making a business case for sustainability in terms of cost savings (25%).

Net zero awareness is growing, but action is still lagging

Previous studies suggest net zero awareness is growing; however, this is not backed by action. In research conducted last year, BSI (British Standards Institution) discovered that net zero awareness had delivered year on year growth. Their ‘Net Zero Barometer’, which surveyed over 1,000 SME leaders in the UK, found that the number of business leaders acknowledging the importance of net zero had tripled since the survey began in 2021^[iii]. According to the report, more than four in five UK SMEs show awareness and understanding of how crucial net zero is, with 82% of business leaders saying sustainability and net zero is important- up from just 30% in 2021. Yet even with this increase in net zero know-how, the report flagged that SMEs are failing to turn their understanding into measurable action. For example, BSI found that while 52% of respondents said they had a net zero policy of some sort, only 20% are measuring progress towards net zero in a standardised way^[iv].

References

[i] NatWest SME PMI Tracker | NatWest Group

[ii] Ibid

[iii] UK SMEs say their net zero awareness is high, yet data shows action is lacking- with less than half setting out a net zero plan or pathway (zerocarbonacademy.com)

[iv] Ibid

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