Net zero pathfinder

Small- and medium-sized enterprises (SMEs) are pivotal to Canada’s trade success, yet in a world where we expect to see a surge in climate-focused regulations, this critical segment is underequipped to reduce their carbon emissions.

Most of the analysis conducted on companies around their net zero transition focuses on trade exposed, emissions-intensive industries, consisting mostly of large businesses. Think about the oil and gas industry, as a prime example. And that makes sense, since these industries would be most impacted by any new regulations targeting emissions reductions. But limited evidence exists on the challenges and opportunities facing SMEs, as they navigate the complex transition to a net zero world.

While individually, SMEs generate relatively low levels of carbon emissions, collectively they’re significant emitters. Canadian SMEs produce approximately 30% of our country’s emissions, totalling more than the combined annual emissions of Quebec, Manitoba, Saskatchewan, and the Atlantic provinces.¹

Individual mitigation and adaptation approaches would have an appreciable impact on Canada’s overall progress toward net zero. How SMEs adapt to the wave of mandated requirements and emissions-related penalties on trade will also determine how competitive they’ll remain both domestically and internationally.

With this in mind, Export Development Canada (EDC) and The Conference Board of Canada recently collaborated on a survey-based study and have published The path to net zero: Survey results from Canadian SMEs. The two reports—based on responses from 381 companies—focus on Canadian SME awareness, action and strategic prioritization of emissions reduction programs.

Our first realization was that measuring SME progress along the transition pathway isn’t straightforward, mainly due to a lack of uniform data at the both the macro and company levels. To fill this gap, our study built a net zero transition maturity framework, to help assess transition progress in a consistent manner. The framework is structured as a sequence of five levels of transition maturity, presenting a clear evolution from occasional initiatives to purpose-driven change towards lower carbon emissions.

According to our study, most SMEs, regardless of province or region, are at an early stage in their journey to reduce carbon emissions. Almost 90% of respondents fall into the first two, emergent levels of transition maturity. Only 18% measure their carbon emissions, and even fewer (15%) have net zero targets. Even among those that measure emissions, we found significant variation within and between the rates of Scope 1, 2, and 3 emissions measured. Most emissions reduction actions are related to recycling and improving energy efficiency.

The main challenges hindering the implementation of greenhouse gas emissions (GHG) reduction strategies for SMEs are cost considerations and staffing limitations. Knowledge gaps in navigating existing regulatory frameworks were also cited.

Respondents pointed to financial support as the most significant factor enabling the implementation of GHG-reduction strategies. Other factors mentioned include training on GHG regulation compliance.

Generally, the SMEs we surveyed appear open to the need to reduce emissions, with 46% signalling an intention to begin measuring emissions. Despite low transition maturity levels, as well as some key challenges, respondents recognize that reducing emissions could boost competitiveness and create new business opportunities.

The bottom line?

Canada’s SMEs are critical to our international trade success, generating almost half of our merchandise exports. However, in a world where we expect to see a surge in climate-focused regulations and increased emissions-related trade barriers, this critical engine of our economy remains woefully underequipped. Supporting our SMEs along their emissions-reduction journey requires a strategic and co-ordinated approach to providing the capital, knowledge and resources they need to compete in the economy of tomorrow.

¹ Smart Prosperity Institute

This week, a very special thanks to Prerna Sharma, senior economist in EDC’s Economic & Political Intelligence Centre and Jennifer Topping, market research principal. We’d also like to thank The Conference Board of Canada for their partnership.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.