On the face of it, the scheme does not appear to apply to SMEs. However, while there’s no mandatory reporting for SMEs, they may find themselves affected by the rules – if they form any part of a large business’s supply chain.
According to the requirement for scope 3 emissions, large businesses must report on the carbon production of their entire value chain, including finance emissions.
If you’re an accountant working with SMEs, it could be time to talk about carbon.
We speak with Aletta Boshoff, National Leader, Sustainability and IFRS & Corporate Reporting, and Partner, Advisory, at BDO Australia, and Linda Brander, Convenor, IPA’s Sustainability Discussion Group, about how to broach the topic.
Conversation one: carbon reporting is about strategy, not compliance
“You can look at sustainability from a strategic perspective or a compliance perspective or both,” says Boshoff.
“Most SMEs don’t have to worry about the compliance requirement of sustainability reporting, but should they consider it strategically?”
Strictly speaking, there’s no legal requirement that SMEs report on emissions.
However, large businesses must report on their supply chains. So, if an SME forms part of a large business’s supply chain, then it is highly likely that the business will ask the SME for its carbon numbers.
If the SME is unable to provide them, then the large business will be unable to meet its compliance requirements. This creates a significant risk that the company will take its business elsewhere.
“For many SMEs, it’s strategically important to report voluntarily,” says Boshoff.
“I articulate this strategic imperative in three ways: access to markets, access to capital and access to people.”
Aletta Boshoff, Advisory Partner and National Leader of IFRS & Corporate Reporting and Sustainability at BDO
Conversation two: carbon reporting is key to accessing markets
For SMEs, voluntary carbon reporting is likely to expand access to markets. As large businesses become increasingly reluctant to engage SMEs that don’t report, those that do will have a competitive advantage.
“Recently one of my clients was approached by one of their biggest customers, because the customer had suddenly changed its criteria for selecting suppliers,” says Boshoff.
“They had added sustainability as a criterion, and weighted it at 20%.
“You’re going to struggle to keep such a customer if you’re not on a sustainability journey.”
Although mandatory climate reporting covers only carbon emissions at the moment, it could be strategically advantageous to start reporting on sustainability more broadly.
“You might find that your customers start asking about what you’re doing for First Nations, and diversity, equity and inclusion,” says Boshoff.
Conversation three: carbon reporting is key to accessing capital
A possible flow-on effect of carbon reporting is its potential to impact SMEs’ access to capital.
“If you want to attract investment or new equity capital in the future, then the investor will ask you about sustainability, as part of due diligence,” says Boshoff.
The same could also apply to financing via loans.
“Banks have to report on financed emissions. They don’t want to have to say, ‘We’re financing a lot of SMEs who don’t care about carbon accounting or sustainability.’”
Conversation four: carbon reporting should be thorough
To ensure that the SME’s entire carbon footprint is captured, it’s essential to think widely.
“What’s the whole ecosystem? Who are the investors? Who provides loans? Who are the customers?” says Boshoff.
This includes considering what happens upstream and downstream.
“Carbon reporting is a wide, diverse concept,” says Brander.
“It covers everything from what goes into manufacturing your products to [what goes into running the business], from your employees’ commutes to your coffee beans.”
This principle also applies to working out whether an SME is part of a large business’s supply chain.
“You could be the company’s biggest supplier, or you could provide cleaning services to just one building – either way, you’d still be part of the value chain,” says Brander.
Conversation five: carbon reporting should start as soon as possible
The roll out of mandatory climate reporting might not start until 1 January 2025, but there’s no time like the present.
“Accountants need to be prepared and educated, so they can think ahead [for their clients] and consider how the change will affect them,” says Brander.
“Don’t wait till someone asks for help. Start having early conversations now. Are your clients part of a large business’s value chain? If so, go to them, and ask for exactly what they’ll need.”
In between having conversations, accountants should start capturing any data that might be relevant.
There are plenty of tools to help, including online carbon accounting tools. In addition, IPA provides resources, training and discussion groups.
“If you spend 12 months on carbon reporting, rather than one, it’ll be much easier,” says Brander.
“Get ahead of the game – when everyone else is stumbling, you can swoop in and pick up business.”
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