The battle SMEs face in reducing their emissions - and proving it

Keeping a contractor’s profit margins in the black can be a careful balancing act at the best of times. Juggling the pressures of a sustained period of material inflation and economic uncertainty while walking this tightrope is a step up in difficulty. Now try doing this while transforming your builder into a net zero business.

It is no wonder that so many SMEs are making slow progress in lowering their carbon emissions when there has been so much else to manage in recent years. Barely a third of small construction firms have a plan to reduce their impact on the environment, according to a 2021 report by the Federation of Small Businesses (FSB). Only 15% have made any changes to their business, the lowest percentage of the UK’s seven largest sectors.

Construction SMEs also scored the lowest out of all surveyed sectors in the FSB report for the proportion of firms which had installed energy-efficient appliances such as heat pumps or solar panels in their offices.

>> Also read: The innovations to tackle construction’s carbon problem

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More than 99.7% of the UK’s 340,000 construction companies are SMEs. The built environment makes up around 40% of the country’s carbon emissions. Reaching the government’s target to achieve a net zero economy by 2050 will not happen unless SMEs in the construction sector jump on the zero-carbon bandwagon en masse.

As part of the Building the Future Commission, we spoke to business leaders and other industry experts about how SMEs can take on the net zero challenge.

One of the biggest contributions that construction SMEs could make to reducing emissions is installing heat pumps in buildings. The government has pledged to make the UK a world leader in this market, with a plan to install at least 600,000 of the devices each year by 2028. 

So the retrofit sector met the news that he UK had one of the lowest heat pump installation rates in Europe  when it emerged in June. Out of 21 countries surveyed in a report by the Climate Change Committee, the government’s net zero watchdog, the UK had installed the fewest heat pumps per capita. With 1,000 installations per million of population in 2021, the UK’s rate was half that of Germany’s and less than a fifth of France’s, while trailing dismally behind Finland’s table-topping 20,000 per million.

This is not the fault of SMEs, but the result of a series of half-baked and piecemeal attempts by the government to kickstart the retrofit market which have resolutely failed to address the key issues of skill shortages and manufacturing costs. Heat pump installation costs rose by nearly 20% in 2021 and, while they fell back by 6.7% in 2022, system component prices and labour costs continue to rise.

This is despite a series of subsidies offered to homeowners and local authorities to fund installation, which aim to boost the market to bring down costs.

An underlying problem is inflation and the cost of living crisis, which is squeezing household budgets and reducing the demand for energy efficiency works. This is reducing both the incentive and the capacity for SMEs to invest in the training needed to carry out retrofit works and other carbon-lowering interventions, including the skills needed to specify sustainable materials or for reusing materials.

Brian Berry, chief executive of the Federation of Master Builders, says the result is that SMEs are focusing on what they have always done. Traditional jobs like extensions or doing up bathrooms and kitchens still make up the vast bulk of business for small builders, because that is what customers want. 

“That’s not their fault,” says Berry. “The consumers aren’t incentivised to actually do [retrofits], because it’s very costly. And, even if homeowners are looking to do that, it can be difficult to find the right tradesperson to do the work because we’ve got a shortage of qualified installers.”

The big problem with getting to net zero is it requires us to conjure up a market that would struggle to exist naturally. Three-quarters of the British public say they are worried about climate change, according to the Office for National Statistics, but 92% say they are concerned about their cost of living.

Translating fears about climate change into energy-efficiency investments when households are facing more immediate problems is a tall order. This is why reducing emissions from the built environment needs committed government intervention, and it might also be why the current government appears to be backsliding on net zero at a time of dwindling public resources.

This is putting in extra costs on a small business where that money would be better diverted to upskilling and learning about how to achieve zero carbon through their work

Brian Berry, chief executive, Federation of Master Builders

The electoral risk of driving too hard on climate policies was made clear in July’s Uxbridge by-election, when the Conservatives held onto Boris Johnson’s former seat in a win seen largely as a protest vote against Sadiq Khan’s plan to expand the ultra low emission zone (ULEZ) across all London boroughs at the end of August. Ironically, Khan’s move could pose a risk to net zero progress by further inhibiting the ability of construction SMEs to invest in training for energy efficiency work.

The lack of a generous scrappage scheme - Khan will hand a maximum of £5,000 to people who replace their polluting vehicle - means many builders will face a daily £12.50 bill to drive in the capital, eating further into margins.

“This is putting in extra costs on a small business where that money would be better diverted to upskilling and learning about how to achieve zero carbon through their work,” says Berry.

“That’s why I think there’s quite a lot of anger, because it is those people who are paying the price to support what low carbon means and other people with a lot more money are not having to pay anything extra. But [SMEs] are having to pay extra on what they’re trying to do – their livelihoods.”

We all seem to be focused on net zero, but we all seem to be focused on solving it in our own way

Olli Jones, North-east sustainability lead, Cundall

When SMEs do want to invest in training, often they find it does not exist in a way which combines all the skills needed for retrofit work. Berry is calling for a comprehensive review of all of the standards for the building trades so they understand how to interact with one another to create a low carbon home.

Olli Jones, North-east sustainability lead at Cundall, says part of the challenge for SMEs is the lack of a forum where SMEs can go for reliable and consistent training to reduce the risk of investing. An example of something like this is Brussels-based education provider CERAA, which advises and educates local SMEs on net zero construction skills such as material passports and passivhaus design. “In terms of our ecosystem in the UK, we are almost a decade behind where they are at in Brussels,” says Jones.

Moving the market forward in the UK is about coordinating parts of a puzzle that already exists, Jones believes. “How do we get all of the parts of our system working in concert? How do we get our universities and our training centres really focused on the same problem? We all seem to be focused on net zero, but we all seem to be focused on solving it in our own way.”

For Neil Ross Russell, managing director of Net Zero Now, a cross-sector organisation which helps SMEs to reduce their carbon emissions, the problem is partly a lack of clarity about what net zero action means for different types of businesses. A situation where firms appear to be making it up as they go along can lead to accusations of greenwashing, something Ross Russell has some sympathy with.

“A lot of greenwashing is accidental. It’s not somebody deliberately trying to pull the wool over someone’s eyes or cutting corners,” he says.

Often they have done some internet research to find out what the advice is, “and then a climate science expert has come along and said, ’you’ve got this all wrong, you’re greenwashing’. And, actually, all they’ve tried to do is take steps in the right direction.”

The risk of inciting a backlash adds to the feeling that there is little upside for SMEs to make a concerted effort to rebrand as a net zero business. If consumers of SME services, often individuals or households, feel they cannot trust a business when it says it has taken action to reduce its emissions, the commercial incentive is reduced.

This is a huge challenge for business. But it’s also a monumental opportunity

Neil Ross Russell, managing director, Net Zero Now

Net Zero Now is currently working with Innovate UK, the government’s research agency, on creating a ‘carbon quote’ for services based on an emissions forecast of a job. This aims to allow consumers to manage their own carbon footprint by selecting a low carbon supplier based on a reliable metric. ”

 Ross Russell has seen an “enormous amount of effort and focus” from every sector and the government on solving this issue. “I think the smaller businesses are sort of waiting to be told what they need to do. And from our experience of talking to SMEs, they want to get on with this, they want to take climate action. The reason that’s holding them back is that they need to be able to justify why it makes sense from a commercial point of view.”

What can small firms do in the meantime? “If I was an SME in construction at the minute, I would be saying, ’I’m not the only person facing this challenge. There has to be a community’. And I would find that community, and I would engage with it wholeheartedly,” says Jones.

”I think if an SME is engaging at the very surface level, it’s probably not going to be around for a very long time. I think this is a huge challenge for business. But it’s also a monumental opportunity.