According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) small businesses account for 98 per cent of all businesses in Australia and contribute half a trillion dollars to the economy.
With the federal government proposing mandatory climate-related disclosure laws for large businesses, requiring them to outline their climate-related financial risks, opportunities, plans, and strategies, it is a unique time for smaller companies as they must work out where they fit among these higher-level changes.
The Australian Securities and Investments Commission (ASIC) states that most Australian SMEs will not be required to meet these laws and will not have direct reporting requirements in the near future.
Despite this, under the new proposed climate-disclosure laws the ‘scope 3’ emissions of a large business with reporting obligations, may include the emissions of its smaller business suppliers. Scope 3 emissions are those emissions that occur up or down a company’s supply chain.
While SMEs can rest assured there is no direct impact to them regarding ESG requirements yet, it is a crucial time for these smaller entities to proactively consider their role in larger companies’ supply chains and begin their ESG journey to avoid potential challenges stemming from the requirements of their own larger clients.
For example, let’s take a textile small business in Australia, which is an essential part of the supply chain for a global apparel company. The emissions associated with the textile small business’s manufacturing, recycling, and logistics practices are part of the global apparel company’s scope 3 emissions. These emissions will form part of the global apparel company’s mandatory reporting obligations under the proposed climate disclosure laws.
How can small enterprises keep on top of this?
SMEs should start thinking about climate-related reporting as they are part of larger companies’ supply chains. This will help with compliance now and also assist if a small business hopes to scale up in the future.
In the longer term, businesses need to integrate ESG into their strategy and operations to stay competitive. Many of my peers have recently been highlighting how SMEs should approach ESG as an opportunity, rather than a burden and consider how they can use it to position themselves as an attractive choice, particularly when businesses have an excess of suppliers they can choose from.
How can SMEs get started, especially with limited resources and budget?
So, where do SMEs start with limited resources in terms of budget and manpower to meet their ESG requirements? In my experience, most components of environmental, social, and governance factors are already deeply embedded in a business’ strategy and operations. This could include diversity and inclusion policies, flexible working policies, or recycling and waste management plans.
These environmental, social, and governance factors all present a range of risks and opportunities for a business. That is, if a business has a lack of governance and business structure that can pose a risk moving forward. On the other hand, if a business has clear, up to date and well regimented protocols and policies that will in turn help the company to grow and uphold a strong structure. Managing these basic ESG reporting requirements can help to protect the business and create long-term value.
Ultimately, the key is to identify these existing factors you already have in place, understand the main ESG priorities through a materiality assessment (an assessment that looks at a business’s environmental impact), and incorporate these priorities into a broader ESG strategy and implementation plan. This way, the business can continue to build its ESG efforts over time. Often, speaking with an ESG advisor can help with creating your ESG strategy and keeping you and your team accountable for maintaining these business changes long term.
