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Companies that digitalize faster will survive

Market share and survival: Why SMEs must embrace digital

An interview with Professor Phoebe Koundouri President, European Association of Environmental and Resource Economists

Gavin Allen: What does the digitalization of SMEs mean to you, and why is it important?

Phoebe Koundouri: Digitalization is crucial for the financial sustainability – the survival – of any business, big or small. It is crucial for Europe to get its SMEs digitalized because SMEs make up such a large majority of Europe’s economy – more than 90%. [Editor’s note: In the US, it is 99%.] So, we want the economy of Europe to achieve financial sustainability while achieving environmental and social sustainability.

To do that, you have to get all of the SMEs digitalized. If the digital transformation is implemented correctly, it will offer companies savings; it will offer them greater access to clients, to bigger market share. It will enhance their ability to integrate environmental targets, using digitalization to reduce their carbon emissions across the whole value chain.

At the same time, it will produce social cohesion, because digitalization offers open access, so you can offer your goods in a way that is more accessible, more equitable in its distribution, in the benefits [the goods] create. They can reach populations that might be marginalized. So it’s really very important.

One other element is the greater sustainability transition, which is about all 17 SDGs [the UN’s Sustainability Development Goals]. It includes green, digital, economic growth, innovation, infrastructure, resilience, education, well-being, equity – all these aspects.

In order to achieve all these things, you need a science-driven background, a data-driven background. So digitalization makes easier the collection of information. You can use AI as well, and machine learning. With the collection of information, with the increase in sensors and satellite data, we have a wealth of data that is valuable for SMEs – not just for reducing their environmental impact or increasing their social impact, but in terms of lowering costs and increasing profits.  

So the companies that digitalize faster, but digitalize in a way that allows them to integrate their other objectives – environmental, financial, economic – will be those that will survive, and will gain a bigger share of the market. 

GA: So you say, “As long as they do it correctly..” What would be the incorrect way of digitalizing?

PK: It has to be inclusive, but also with the right infrastructure and tools. Because if you’re increasing the need for computing power and other digital infrastructure, then you will really increase your energy consumption. So nowadays, digitalization basically increases the need for energy.  And because energy has not been decarbonized yet, this has a negative impact on the environment.

The other way that digitalization can be done incorrectly is not to seriously engage in continuous learning, upskilling and re-skilling. Yes, make big investments in particular technologies. But companies need to be careful about how much infrastructure investment they do, vs. how much you invest in upskilling and re-skilling your personnel.

GA: Digitalization is a potential drain on energy, but at the same time, can we say that sustainable economic development isn’t really possible without SME digitalization?

PK:  It’s not possible. The difficult thing about sustainability is that it is a holistic, integrated, inter-disciplinary challenge, and we have no real skills in this area. Humankind works in silos; we specialize. We are comfortable where we are familiar with the data, with the models, with the technologies and how they are used. These silos need to be broken at different scales: at the family or household level, at the community level, in schools, and at SMEs as well. They have to digitalize, but they have to do so in a way that allows them to integrate all these aspects of sustainability.

And we know exactly what those aspects are: 17 [SDG] goals, 169 targets – we know what sustainable development is. And we know, in detail, how to break down the different companies and how this can come together in a holistic framework.

So the huge challenge is to engage in digitalization, engage in greening, engage in social cohesion, engage in economic development and positive growth and job market players in a way that takes all these different aspects into account. So, what we say is no SDG can be implemented without the other 16 being implemented. They’re interlocked.

The scientists know how to do it. We have the tools. But they are so data-heavy that it’s a big challenge to massively deploy the knowledge to do this.

GA: So, two questions. One: in light of all these vast challenges, are you optimistic? Two: where does the onus lie – on states? On businesses? Who is it that isn’t pulling their weight?

PK: The tragedy of sustainability is the tragedy of the commons. ["That which is common to the greatest number gets the least amount of care.”] But there is a systematic way to address this tragedy.

First, you need to know what science tells you.  What are the optimal pathways to follow when it comes to the technologies that you need.  Then, you can bring in government to incentivize the part of this transformation that is publicly owned. If the transformation is publicly owned, it will be difficult for private companies’ interest to capture the profits of the investment. So the part of the transformation that produces benefits that are public goods should be financed by the government, by taxpayers’ money. The part that can be captured as private profit should be financed by private companies.

GA: And by SMEs themselves? Or by companies like Huawei investing in them or providing a structure?

PK: Both. The big companies have a bigger role to play in public-private partnerships (PPPs). But SMEs have a big role to play as well – especially in Europe but also around the world – because they capture such a big percentage of the whole economy. They have to have a big role. That’s why there are many instruments for PPPs with SMEs. So, the government puts up some money; the SME puts up some money. They produce a combined transformation from which they both can benefit.

For example, I’ve been going to COP [the UN climate change conference] for 25 years. The best COP of my life was the one in Glasgow, because it was the first time that renewable energy was acknowledged as being not just cost-effective, but profitable. It was becoming competitive with fossil fuel. Per unit, it is cheaper to produce energy from solar or wind than from fossil fuel. And that’s even if you ignore negative externalities such as the toll on human health inflicted by the burning of fossil fuels.

Policies can make renewables even more cost-competitive by forcing polluters to pay for the health costs of fossil fuels.

It’s the same for the circular economy. It will become more cost-efficient for companies to have a circular value chain than not.

GA: What about really small businesses with only a few employees, which don’t have the capacity to implement these sustainability-related reforms – at least not at the moment. How do we help them get to where they need to be?

PK: Even if you’re an SME, and have low capacity with regard to new green digital technology, you can get cheap loans. If you want to invest in digitalization, you can get loans with very good terms. What is crucial here is a massive investment in upskilling and reskilling of the SMEs. Not so much to use the technology, because that will happen if they understand how much they have to gain and understand that their survival depends on their green and digital transformation. It’s about understanding the potential, understanding the danger of not engaging, and then being provided with the financial means to make the necessary investments. The bottleneck is the understanding that this is crucial to your continued survival as a business.

Governments need to engage SMEs and say, “Here’s an opportunity.” Otherwise, the SME may think, “Well, this is a huge cost and I don't know what it’s going to get me.” 

GA: So, regarding the future, are you glass half-full, or glass half-empty?

PK: Half-full! It has to be; there is no other way out. And it drives me crazy because science has the solutions. The money’s there – globally, we have the money. But even if Europe and the US become climate neutral, we won’t get anywhere unless everyone is on board.

So, policies, technologies, and financial tools. We need the optimum mixture of these three things. Governments need to invest the necessary resources, and get people engaged.

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