As the world’s leaders gather in Glasgow to commit to 2030 emissions reductions targets, decarbonising global supply chains – which account for as much as 80% of the world’s total carbon emissions – will be vital. However, achieving this will be no mean feat, and will require a colossal US$50tn investment into small and medium enterprises (SMEs), according to new research by HSBC and Boston Consulting Group (BCG).

The report, titled Delivering Net Zero Supply Chains, finds that SMEs will need up to US$2.8tn a year between now and 2050 in order to bring the carbon footprint of global supply chains down to zero – and calls for a “leadership crucible” involving multiple actors working together within and across supply chains to make this happen.

According to the International Panel for Climate Change, meeting the goal of limiting global warming to 1.5°C above pre-industrial levels – believed to be an upper limit for maintaining much of human civilization – will require two stringent measures. First, annual industrial emissions must be reduced in line with scientific estimates, which means halving them by 2030. Second, the impact of past human activity must be reduced further, ideally by removing greenhouse gases (GHGs) from the atmosphere, and getting closer to pre-industrial levels by 2050 or sooner.

Previous research by BCG in 2020 found that US$100tn of equity, bonds and loans to fund initiatives such as electrification and alternative technologies would be required to achieve the future net-zero scenario. For corporates, there are three general categories of emissions to manage, labelled scopes one, two, and three in the Greenhouse Gas Protocol, a global framework for measuring and managing GHG emissions. Scope 3 is the category of supply chain-related activities, and because this is the largest category in GHG volume and in complexity, HSBC and BCG calculate that half of all climate-related funding must be delivered to SMEs in order to effect change.

However, delivering this investment to millions of fragmented SMEs represents a substantial challenge in terms of market access and risk appetite.

In recent years, several large corporations have – in partnership with their banks – used the interdependence of supply chains as a motivating factor to drive better environmental performance. In 2017, US retail giant Walmart launched Project Gigaton, with the aim of eliminating one gigaton – a billion tonnes – of greenhouse gas emissions from its global value chain of upstream suppliers and downstream consumers by 2030, and linked up with HSBC to develop a sustainable supply chain finance programme to give those suppliers who meet sustainability goals cheaper financing. Earlier this year, UK retailer Tesco followed suit, launching a programme with Santander to provide suppliers with preferential financing rates if they meet targets around carbon data disclosure, emissions reduction and progress against sustainability goals.

Nonetheless, according to the HSBC and BCG report, simply mandating new standards and demanding more of suppliers will lead to “limited progress and missed goals”.

To uncover the challenges faced, BCG and HSBC focused on two sectors: textiles and automobiles. The two firms conducted a survey of 126 HSBC clients in the two sectors, made up of 53 SMEs and 73 large corporations, and found that over half of the large businesses had a net zero transition plan but the “vast majority” of SMEs did not, with a lack of access to finance being a key preventing factor.

Many suppliers are unlikely to have the knowhow and resources to make the transition, the report says, adding that most small businesses “don’t have the capacity or money” to focus on a net zero strategy.

Other challenges holding them back include a lack of incentives, knowledge and resource gaps, and unclear and costly data gathering and reporting methods. Meanwhile, SMEs are also often of such small scale that they tend not to reach the participation threshold for carbon pricing schemes recognised by government tax regimes. This means that they are typically under the radar for country or sector-wide targeted reductions.

“Despite the positivity of increasing numbers of large corporates making net zero commitments, the reality is that delivering on scope three emissions will be extremely challenging unless urgent action to support SMEs is taken now,” says Natalie Blyth, HSBC’s global head of trade and receivables finance. “This report highlights the need for a new front in the battle to combat climate change and to build coalitions, break down barriers across supply chains and stakeholder groups, and transition supply chains holistically.”

To put these principles into practice, the report’s authors call for SMEs to be provided with education, incentives, technology and other resources so that they can use climate-related funding in the most effective ways to decarbonise their emissions.

“Targeted, ring-fenced and affordable capital is a key enabler of the net zero supply chain, but banks will not be able to do this alone”, the report says, adding that banks must help clients with sustainable supply chain finance programmes to lower the cost of borrowing for SMEs, as well as entering public-private partnerships with governments and development banks to be able to fund more.

“We cannot reach climate goals without transforming SMEs, and this report offers a road map for that transformation,” says Sukand Ramachandram, managing director and senior partner at BCG. “Forward-thinking governments, industries and companies will have an eye to the economic opportunity that exists for those who can inspire and incentivise, and lead the charge from ambition to action.”