• Nearly 1 in 3 SMEs say difficulty in measuring their carbon footprint is major obstacle to sustainability
  • SMEs cite increased cost inflation as biggest obstacle to climate action in the next 12 months.
  • Prioritisation of sustainability at SMEs remains subdued compared to its peak in June 2022  


UK SMEs experienced a challenging end to 2022, with business activity falling for the last six months amid shrinking demand and severe pressure on customer budgets from rising inflation. SME construction companies experienced a particularly sharp drop in output as higher borrowing costs and worsening housing market conditions led to the fastest fall in business activity since May 2020. In contrast, SME manufacturers and service providers pointed to slower reductions in output volumes.  

A common theme reported by survey respondents was intense pressure on margins due to higher energy, raw material and staff costs, alongside more subdued pricing power.


Sustainability action plans at UK SMEs

The challenging economic outlook and worries about persistently high inflation continued to hold back sustainability plans among SMEs. The index reports that just 39% SMEs intend to prioritise climate action over the next 12 months, the joint-lowest since the survey began in February 2020.  

Only two of the five areas surveyed in the index picked up in December; an increase in SMEs transitioning to cleaner business processes (48%, up from 46%) and the number of SMEs making sustainable product launches (26%, up from 25%). The biggest fall was the portion of firms citing monitoring supply chain sustainability as a high priority (27%, down from 30%).  


Obstacles to climate action in 2023

UK businesses were also asked about the major obstacles to action on environmental sustainability over the course of 2023. Around two-thirds of SMEs (68%) cited rising business costs as a constraint on climate action in the next 12 months. The manufacturing sector was most likely to report hikes in cost burdens as an obstacle (76%).

The second-biggest challenge for SMEs was difficulty in measuring their carbon footprint (29%), These challenges were also the second-biggest issue cited by large businesses (28% of respondents). Many firms commented on a lack of information about carbon emissions across their international supply chain, especially in relation to basic materials sourced from abroad.


Cost inflation set to put pressure on sustainability goals

Over two-thirds of UK SMEs (68%) highlighted that greater operating expenses are likely to prove an obstacle to becoming more sustainable in their business activities in 2023, according to December data.

Hikes in energy and material prices were especially pertinent factors for SME manufacturers, with 76% highlighting higher costs. SME manufacturing firms were also especially likely to report difficulty finding cost reduction opportunities through climate action (32%) and falling customer demand (29%) as obstacles to sustainability initiatives.   



Large firms highlight a lack of sustainable suppliers and skills shortages

The obstacles to becoming more sustainable differed between SMEs and large firms, with the former much more likely to report difficulty navigating government regulation. Manufacturing SMEs were especially concerned about securing investment and funding (25%).

Large firms commonly cited constraints on their sustainability goals from a lack of sustainable suppliers (25%) and staff skills shortages (25%). Devoting greater resources to increasing the skills of current employees, alongside near-shoring supply chains were often suggested as factors likely to combat these obstacles.


Andrew Harrison, Head of Business Banking at NatWest Group, said:

“It’s concerning that businesses are saying that they’re experiencing challenges measuring their carbon footprint, and that this is standing in their way to becoming more sustainable. There are a wealth of tools out there to help companies with this, and a lot of them are free.

“At NatWest we have launched our free Carbon Planner tool which helps businesses measure their carbon output and recommends ways to identify potential cost and carbon savings. All NatWest Business Banking colleagues have also been trained by the Universities of Edinburgh and Cambridge in helping businesses with their carbon reduction. These are just some of the free and easy solutions that NatWest offers companies to become more sustainable.”


The full list of obstacles listed by the survey were; rising business costs, lack of sustainable suppliers, shortages of skilled staff in sustainability, unable to accurately measure carbon footprint, falling customer demand, difficulty finding revenue opportunities through climate action, difficulty finding cost reduction opportunities through climate action, lack of availability of investment/funding, government regulation and sustainability is not a priority for my business.


Read the latest NatWest Sustainable Business Tracker report (PDF 733KB).




Laura Blumenthal

Media Relations Manager




S&P Global Market Intelligence

Tim Moore

Economics Director

01491 461 067



Sabrina Mayeen

Corporate Communications

07967 447030



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