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Sustainability reporting: why should SMEs care?

Author: ICAEW Insights

Published: 01 Dec 2021

Call it the pandemic effect, but the penny is finally dropping that environmental and social reporting is becoming the responsibility of all practitioners and companies – not just large complex organisations and their advisers. Johan Barros, EU Policy Manager at Accountancy Europe, explains.

“We take the climate emergency very seriously,” says Barros. “Sustainability is one of Accountancy Europe’s main priorities for the next few years. And this permeates into all areas of our work, including those that relate to SMEs”. Accountancy Europe is a pan-European trade association representing 50 European member bodies that reach about 1m members in total.

“It’s not a case of whether or not SMEs should prepare for sustainability reporting, it's more a case of how they should prepare and at what speed,” he says. “We try to drill down into the detail and ask why sustainability reporting is so relevant for SMEs – especially at a time when they are recovering from COVID. But there are not just huge existential risks, there are also opportunities for SMEs because of the sustainability agenda. That is why we think sustainability should be at the forefront of SME thinking.”

That’s where the accountants come in

He points out that it is not Accountancy Europe’s view that SME owners and managers – who are busy with the day-to-day challenges of keeping their businesses afloat – should be on their own when thinking about long-term sustainability strategies and the transition they need to undertake. “That is where SME’s trusted advisors – the accountants – come in,” he says.

“There are a number of risks and opportunities that we see SMEs need to address around sustainability. The first is climate which will affect everyone, our planet, our ecosystems, and future generations. For SMEs, we can see that some [JB1] business models are becoming increasingly outdated.”

This risk may deter future generations from taking over the reins, potential business partners coming on board or future buyers being willing to acquire the business at a market price. “There are some very concrete ways in which not taking sustainability into account can be a big risk – not to mention the risk of losing out in terms of the competition for market share,” says Barros. “We believe that embracing and integrating sustainability factors into business models can deliver the best competitive advantage, especially for consumer-facing businesses.”

Risks involved when not taking sustainability into account

In terms of indirect risks, Barros points to the risks SMEs face of coming up against regulatory requirements. “This is perhaps not yet the case when it comes to sustainability reporting specifically but governments across the European Union are legislating on specific areas of sustainability: energy efficiency, air quality, water sustainability, and so on. And all these requirements will also affect SMEs. If SMEs don't take these regulatory changes into account and adapt their business models, then they risk the threat of fines, penalties and reputational damage,” he says. 

So, is it fair to say that it becomes evident that an SME is taking its responsibilities and obligations around climate risk, energy transition and biodiversity loss seriously when provision for them appears in the company report and accounts? 

“We believe that sustainability reporting is the ultimate stage in SME action in this area. There are so many things that businesses can do before that reporting stage to demonstrate the sustainability of their business,” he says.

Accountancy Europe is encouraging SMEs to embrace sustainable transition, even if that transition does not result from regulatory requirements, or if legislation on sustainability reporting does not affect SMEs directly. “We call this a regulatory spill-over effect, and this is what will primarily affect SMEs initially,” says Barros. 

“Even if new EU rules or sustainability reporting standards only affect large multinationals, these multinationals will have SMEs in their supply chains and, for these multinationals to be able to undertake their own sustainability reporting, they will require sustainability information from their SME suppliers. The same will be true for banks. There are increasing requirements on banks to have a portion of their lending steered towards sustainability projects. So, SMEs applying for loans to finance their businesses also face the risk of banks increasingly requiring proof of their sustainability.”

Action is needed now

What should SMEs be doing now? “First of all, they should work with a trusted independent adviser, such as the accountant. They should undertake a root and branch review of the sustainability of their businesses and create a sustainability strategy or vision for the business. This will entail mapping the SME supply chain, taking a deep look at the business model and its operations, and then identifying where there are bigger sustainability risks or sustainability impacts in areas such as biodiversity, water purity or energy efficiency. And once those risks have been identified, they need to be prioritised,” he responds.

Importantly, SMEs also need to integrate risk mitigation techniques into their business processes and, where relevant, they need to collaborate with their supply chain partners to help them address specific risks to the business, but also the risks that stem from the relationship between that SME and its supply chain partners. Again, this is something an accountant can help with.

Next, SMEs should define their own sustainability KPIs and monitor their progress towards meeting these KPIs and then evaluate whether further measures are needed. Finally comes the recording stage. “This can consist of communicating about and reporting on sustainability policies, the business’s progress in relation to those policies and the production of sustainability metrics,” says Barros. “We believe all this has to take place before a business can realistically start thinking about undertaking more mature sustainability reporting disclosures as part of, for example, their annual reports, management reports or other forms of disclosure.”

Barros is emphatic that the accountancy profession is committed to supporting its SME clients to deal with sustainability requirements. “We're quite optimistic,” says Barros. “We firmly believe that accountants are key people in getting SMEs to where they need to be .”

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