Sustainability reporting has become standard for listed companies in recent years, but what is the future of sustainability reporting for SMEs?
Regulators, investors and other stakeholders have come to expect clear communication from organisations about their environmental and social impact, but this is often seen as unnecessarily burdensome for smaller businesses. A new report from ACCA, though, argues that providing sustainability information could create a competitive advantage for SMEs.
According to Sustainability reporting – SME Guide, businesses of all sizes must be ready to provide sustainability-related information because it is being asked for and expected, not only in annual reports but also in the context of regulation, procurement and service-level agreements. Failure to provide this information – and to use it in operational decision-making – could lead to negative outcomes for SMEs.
‘In the battle for talent, sustainability reporting will help SMEs recruit and retain high-calibre employees’
The presence of SMEs in the value chains of larger organisations is pushing many smaller companies towards formal sustainability reporting, but the report stresses that this should not be seen as a burden. Instead, it says, sustainability reporting puts SMEs ‘in a much stronger position financially – making it easier to attract investment and obtain preferential terms of trade with suppliers. In the battle for talent, it will help them recruit and retain high-calibre employees.’
Mindset shift
The report looks closely at the ‘shift in behaviours and mindset’ that will be needed within SMEs to better meet sustainability reporting requirements, along with changes to reporting processes, and greater use of technology and people skills.
‘In this,’ says the report, ‘professional accountants have a vital role because they are expert in financial matters to which sustainability connects; bound by ethics; and expected to act in the public interest.’
Sustainability reporting within SMEs would require at least moderate changes to processes
The report uses as its basis the ACCA’s eight-stage sustainability reporting cycle, which represents the essential processes, people and technology requirements that underpin the creation of sustainability-related reports and information, and provides links to helpful further explanation and videos throughout (see the 2023 report Sustainability reporting – the guide to preparation). The report argues that SMEs that invest in all stages of the cycle ‘are in a better position to secure competitive advantage’.
Culture change
The road towards robust sustainability reporting begins with engraining sustainability into the organisation’s culture. This includes:
- governance – processes, controls and procedures to monitor and manage risks and opportunities for sustainability
- strategy – approach to managing sustainability-related risks and opportunities (SRROs)
- risk management – processes to identify, assess, prioritise and monitor SRROs
- metrics and targets – the measures to indicate progress on the strategy and risk management related to SRROs.
Impact on reporting
A LinkedIn poll carried out as part of the research found that introducing sustainability reporting within SMEs would require at least moderate changes to their reporting processes in the majority of cases because current financial reporting processes are not fully developed, or because new data requirements and/or measurement techniques are needed.
Respondents to the poll also acknowledged that analysis and presentation of the information needed to cater for a wider range of stakeholders than for financial information.
The report acknowledges that SMEs will need to collect a lot of data and set parameters carefully to ensure that the data meets the needs of users.
The current financial reporting package in SMEs will need to evolve to encapsulate sustainability reporting
It found that SMEs determine which data they need to collect by looking at sustainability reporting frameworks and standards, and at requests from their customers, supplies and other stakeholders. Data is likely to come from multiple sources within and outside the organisation, and SMEs will need to consider the ease of access of data, but also its accuracy and verifiability.
The current financial reporting package in SMEs, says the report, will need to evolve to encapsulate sustainability reporting. A poll carried out as part of the report found that most SMEs are using spreadsheets to collect, analyse and report sustainability information.
Tech needs
While there are numerous technology solutions available to support organisations in sustainability reporting, the report acknowledges that the size and complexity of each individual organisation, and its need for sustainability information, will influence the role of technology in sustainability reporting.
‘There’s no point thinking technology is going to be the panacea if you don’t know where your data is coming from’
One environmental, social and governance reporting and assurance expert quoted in the report warned that data should come first: ‘Rubbish in, rubbish out: there’s no point thinking technology is going to be the panacea and solve all of your problems if you don’t know where your data is coming from, and you haven’t got data at the right granularity to report on.’
The report sets out the criteria that will help SMEs select the right technology:
- the types of data that need to be collected (eg structured or unstructured)
- the right level of granularity to meet internal and external reporting needs
- where the data is sourced
- who collects and inputs the data
- internal controls over the data
- how the data can be assured
- any gaps in the organisation’s data collection and processing infrastructure
- cost and affordability.
Presenting the information
Presentation of sustainability-related information for SMEs will be heavily influenced by its intended use. Formal reporting in an annual report, for example, will be guided by sustainability reporting frameworks or standards, whereas presentation for value-chain reporting may be dictated by the organisation that has asked for the information.
The SME will also need to decide where to place its sustainability reporting (eg as part of the management commentary section of its annual report), its format (narrative, quantitative or visualised), and whether it should be paper-based or digital.
The report recommends that SMEs collaborate with each other and with users to develop a consistent sustainability reporting template that:
- starts small, but allows for more complexity and detail to develop
- reflects how often contents might need to be updated
- is suitable for formal reporting, internal decision-making, and requests from investors, finance providers and from within the value chain
- is suitable for the other stakeholders, such as employees and communities.
Overall, the report stresses that it is crucial that the sustainability-related information produced by SMEs is reliable and trustworthy. It also notes that the sustainability reporting landscape is constantly evolving.
