As of 2024, most Small and Medium Enterprises (SMEs) around the world are not required to make climate-related disclosure in their country. However, there are still plenty of reasons to make climate-related disclosure as a SME.
Reasons/Benefits for SMEs to Report Their Climate Data
- Brand Differentiation & Customer Loyalty: Sustainability reporting creates a positive brand image and can be a differentiator in a competitive market. Consumers are increasingly environmentally conscious. SMEs that demonstrate genuine commitment to sustainability are likely to earn greater customer loyalty.
- Premium Pricing & Cost Saving: In 2023, EY has found 44% of consumers will switch to a more sustainable product if they can and 32% are willing to pay a premium for sustainable products and services. On the other hand, according to a study by the Carbon Trust, implementing energy-saving measures can lead to significant cost savings for SMEs.
- Investment & Talent Attraction: Investors are increasingly considering environmental factors in their investment decisions. Reporting climate data can attract investors who prioritize sustainability, thereby improving access to capital and investment opportunities. Also, Millennials and Gen Z generations increasingly prioritize working for companies with strong sustainability practices. Reporting your climate data can be a valuable strategy for attracting and retaining younger talents.
- Alignment with Business Customers: If your business customers are listed companies in countries where climate-related disclosure is mandatory, chances are they will have the pressure to ask your business, as their supplier, to demonstrate your sustainability. Reporting your climate data helps you stay competitive in the eyes of your business customers and potentially gain access to new markets.
- Enhanced Stakeholder Trust and Reputation: Reporting climate data demonstrates transparency and accountability, which can enhance stakeholder trust and improve the company’s reputation. According to a survey by PwC, transparent reporting of environmental data can help build trust with stakeholders and foster long-term relationships.
- Risk Management and Resilience: Climate-related risks, such as extreme weather events and regulatory changes, can impact business operations and financial performance. Reporting climate data enables SMEs to identify and manage these risks effectively, thereby improving resilience.
- Future-Proofing your Business: Climate change regulations and consumer preferences are likely to become stricter in the future. Proactive reporting positions you well to adapt.
Which Standards Should SMEs Align to When Reporting Climate-related Disclosure?
Which sustainability reporting standard to follow depends on your SME’s geographic location, industry, suppliers and customers, business model, climate-disclosure intent, and other factors.
Prioritizing Jurisdiction or Supply Chain: IFRS S1 & S2
Most jurisdictions that make it mandatory for large companies to disclose climate-related data align with the IFRS S1 & S2 standards, a successor of TCFD (refer to: When & What Climate-related Disclosures will be Required in My Country? An Around-the-World Complete Guide). There are two notable exceptions: EU member countries are required to make climate-related disclosure in accordance with the EU Corporate Sustainability Reporting Directive (CSRD); and USA has its own rules over sustainability reporting, which include disclosing Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions.
If your country, suppliers or customers have adopted TCFD / IFRS S1 and S2 disclosures, it might make sense for your SME to follow these standards as well.
Prioritizing Adoption & SME Support: GRI
A 2022 KPMG report found GRI to be “the most commonly used reporting standard globally”. Collaborating closely withUnited Nations Sustainable Development Goals (SDGs), GRI has a history of supporting sustainability reporting for SMEs. While this leading status might be caught up by the IFRS standards since, as mentioned, IFRS has become the most adopted mandatory climate-related disclosure standard around the world, the GRI standard could still be relevant for SMEs.
Prioritizing Guidance for SMEs: CDP
CDP, a global non-profit that runs the world’s environmental disclosure system for companies, cities, states and regions, offers a dedicated climate disclosure framework for SMEs. It has “alignment with and influence from frameworks and standards such as the GHG Protocol, TCFD, CDSB, SBTi, SDGs and the 1.5 Business Playbook”. Since 2021, CDP has collaborated with the SME Climate Hub, in partnership with the Exponential Roadmap Initiative and Normative, “to empower small and medium-sized enterprises (SMEs) to make strategic and impactful climate commitments, track and report progress against those commitments, and demonstrate climate leadership.”
Prioritizing Industry: SASB
Managed by the International Sustainability Standards Board (ISSB) of the IFRS Foundation, SASB provides industry-specific standards for sustainability reporting, including Consumer Goods, Extractives & Minerals Processing, Financials, Foods & Beverages, Health Care, Infrastructure, Renewable Resources & Alternative Energy, Resource Transformation, Services, Technology & Communications, and Transportation. SASB helps companies in these industries “to make consistent and comparable sustainability disclosures” that might “affect the entity’s cash flows, access to finance or cost of capital over the short, medium or long term.”
Prioritizing Greenhouse Gas Emissions Disclosure: GHG Protocol
GHG Protocol is the world’s most widely used greenhouse gas accounting standards measuring and managing emissions across various sectors, including private and public operations, value chains, products, cities, and policies.
This makes the GHG an essential protocol to use when declaring your SME’s sustainability. As CDP states in A Climate Disclosure Framework
For Small and Medium-sized Enterprises (SMEs): “Every company should measure its emissions and determine its impact on the climate as a starting point. Only then can the company begin to manage and reduce its negative environmental impact effectively… Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.”
If you decide to follow IFRS S2, the newest IFRS standard published on June 2023, note that it also requires “a separate disclosure of Scope 1 and Scope 2 GHG emissions for (1) the consolidated accounting group, and (2) associates, joint ventures, unconsolidated subsidiaries or affiliates not included in the consolidated accounting group”.
Prioritizing Global Sustainability Effort: SDG
Lastly, if your SME wishes to support United Nations’ 17 Sustainable Development Goals, consider aligning your reporting with specific SDGs relevant to your business. The UN SDGs are: 1: No poverty, 2: Zero hunger, 3: Good health and well-being, 4: Quality education, 5: Gender equality, 6: Clean water and sanitation, 7: Affordable and clean energy, 8: Decent work and economic growth, 9: Industry, innovation and infrastructure, 10: Reduced inequalities, 11: Sustainable cities and communities, 12: Responsible consumption and production, 13: Climate action, 14: Life below water, 15: Life on land, 16: Peace, justice, and strong institutions, and 17: Partnerships for the goals. As mentioned, GRI has offered detailed linking with SDGs.
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