In recent years, the drive to mandate and improve the reporting of sustainability and climate-related matters has focused on listed companies and larger private entities. Smaller companies may therefore be tempted to dismiss sustainability reporting as something they don’t need to worry about. But is that really the case? This article looks at how and why sustainability issues impact businesses at the smaller end of the market. 

Emissions data and supply chains

Although small companies do not have to disclose emission figures in their own financial statements, they may still be asked to calculate and report this data to another entity that is part of its supply chain. This is because entities within scope of the relevant regulations will need this data so they can calculate all of the indirect emissions that occur in their value chain (known as Scope 3 emissions) to meet their reporting requirements.

As more reporting requirements come into effect for listed and larger entities, requests to smaller entities for their emissions data are likely to become more common. Those able to readily respond with accurate data may find they have a competitive edge when it comes to winning new business or retendering for existing contracts.

Although such requests for carbon data may initially be limited to the calculation of the current position, requests in future years are likely to extend to include the actions an entity is taking to manage and reduce its carbon impact. This is driven by UK regulation to become net zero by 2050, the green finance bill, and by the reporting entities’ own net zero commitments which will require them to manage the impact of their supply chain.

Smaller entities should not simply view this as a client relationship issue. Engaging in this process will provide an opportunity for management to further consider the entity’s impact on the environment and embed the addressing of climate-related and other sustainability issues into its own strategy. 

Those entities that do go to the effort of calculating their emissions figures might also wish to consider voluntarily disclosing this data in their own financial statements. This may stand them in good stead when reporting requirements eventually trickle down to the smaller end of the market. Entities may find that reporting emissions under an established framework such as the Streamlined and Energy Carbon Reporting requirements could help them avoid any accusations of greenwashing. Doing so will also ensure that there is a clear link between information the organisation is sharing elsewhere about its sustainability efforts, such as on its website, and other information in the public domain.

Debt and financing

Banks are increasingly engaging with their clients about sustainability action and taking sustainability credentials into account in financing decisions. Finance products are also evolving in this area, with preferential rates sometimes being offered if entities are able to demonstrate progress against ESG-linked targets. These need not be solely relating to carbon emissions but could also be linked to other areas of sustainability such as those set out in the 17 UN Sustainable Development Goals. 

Small entities wanting finance to expand their operations may find it is in their interest to consider which of these goals most closely relate to their business. Setting SMART targets in this regard will also ensure that their achievements can be linked to the loan and open up the potential for reduced interest rates. If entities are considering wider sustainability developments and changes to their business of a capital nature, such as solar panels or changing vehicle fleets to electric, they may also be interested in products now entering the finance market which link the payback of the loan with the sustainability benefits of the investment.

Future environmental regulations

The UK government is introducing a range of environmental regulations and targets in response to increased public expectations in this area. The next few years will see, among other measures, the phasing out of gas boilers in new homes, the introduction of zero-emission HGV vehicles and the setting of targets on sales of new electric vehicles. These environmental regulations will impact businesses of all sizes and small entities will need to ensure they have the resources to keep abreast of developments and monitor any potential impact on their business model. 

The chance to make a difference

The social perspective is a further reason for small entities to engage with sustainability. The topic is becoming increasingly important to people in their own lives, and they are also wanting to work within organisations that are true to their own values. So if your business is not considering its impact, this may have a knock-on effect on people considering engaging with your business.

Sophie Parkhouse, Technical and Training Partner, Albert Goodman