One of the interesting things about sustainability disclosures and frameworks is the differing ways they apply depending on company size. Of course, it makes sense for large companies to have more comprehensive reporting requirements, but what happens when the line between ‘big company’ and ‘small company’ becomes, well, a cliff edge?

Not Sustainable works with lots of UK-based companies that have somewhere between 50 and 1,000 employees.  Now, that’s a fairly big size range, and within that there will be various levels of capability and ambition.  But within the Science Based Targets Initiative (SBTi) Corporate Net Zero Standard (the global ‘gold standard’ for setting a carbon target) there are only two categories of UK company based on size – small or large. (Strictly, SBTi v2 proposes three categories based on size and geography but once these categories are applied, the same still stands.)

The SBTi recently consulted on version 2 of the standard, and the current simplified approach for SMEs in the UK and other upper-to-middle income countries is largely unchanged.  However, full requirements apply to established companies with more than 250 employees whether it is a local, family run business with 251 employees or a global multinational with 50,000 employees.  (It’s important to note that there are also thresholds for balance sheet, turnover, and emissions, but for many companies ‘number of employees’ will be the deciding factor.)

Let’s be clear that we are delighted with many of the changes being proposed in v2 – there’s so much good stuff in there, it won’t fit into one blog.  But the cut-off point between ‘small company’ and ‘everything else’ really matters if we are to encourage positive action and incentivise all businesses to make credible net zero commitments.  The SBTi standard was developed with large companies in mind (this is, of course, where the biggest emissions reductions need to happen), and this leaves small-to-medium sized companies (we’d  include 250 to 1,000 employees in this) in a tricky situation.  Why is this the case?

Firstly, while we wholeheartedly agree on a simplified approach for small companies, the only current requirement for Scope 3 is to commit to ‘measure and reduce Scope 3 emissions’.  For many businesses Scope 3 accounts for 90% or more of the total carbon footprint – and for businesses that have no Scope 1 or 2 emissions (for example, those with no vehicles and a renewable energy tariff), there is essentially no requirement to improve.  Conversely, many SMEs are proactively measuring and reducing their Scope 3 emissions, going over and above what is required by SBTi, but not receiving formal recognition for this.

Secondly, the splitting of companies into simply small or large (or more accurately Category A & B) puts a significant burden on medium (or ‘smaller large’) companies (more than 251 employees, but not thousands) that should arguably be split into a 3rd category.  These medium companies are the large companies of the future – they need an approach that is proportionate yet ambitious.

In both cases, we believe that some element of Scope 3 reporting and target setting is needed for the SBTi route to be meaningful. In our response to the SBTi V2 consultation , Not Sustainable cited our concern for ‘arbitrary cut-off points and a gulf between the amount of information required from a larger company vs that required for an SME, with nothing in between’.

Luckily, we believe there are several ways in which this can be addressed – for example, an ‘SME+’ or ‘gold star’ approach would recognise a more advanced level of target setting among SMEs that include Scope 3.  Alternatively, SMEs could be required to map their emissions against the Scope 3 categories, and submit a plan for quantifying the most significant ones.  Such approaches could be voluntary for the smallest companies, and mandatory for companies with, say 250 to 1,000 employees – with the option to opt into the full SBTi validation process.

We applaud SBTi for their brilliant work in updating the current standard – version 2 shows great progress on requirements for transition plans, net zero aligned advocacy, and indirect mitigation for Scope 3, among many other positive changes.  But it seems like a big miss to assume a company of 500 employees should have the same reporting capabilities as a company of 50,000 employees, and that every company with less than 250 employees wants to take the easy route.

We’d love to hear your thoughts on the subject – whether you are an SME, a sustainability consultant, a large business or a standard setter – drop us a line.