The increasing emphasis on sustainability is bringing about a significant transformation in the dynamics of the global business landscape. Confronted with the persistent impacts of climate change and a spectrum of environmental, social, and governance (ESG) risks, businesses are now facing heightened pressure to identify, evaluate, and disclose their sustainability risks and strategies. This imperative is underscored by the growing consumer demand for eco-friendly products and services, as well as the introduction of international and domestic laws from 2024 mandating sustainability reporting across an organisation and its supply chain.
As a result, the global unification of ESG reporting guidelines under ISSB standards has become a vital element of modern business strategies, applicable to organizations irrespective of their industry, size, or geographical scope.
In alignment with Australia's commitment to achieving net-zero emissions, starting July 2024, the federal government is expected to commence a phased rollout of standardized, globally aligned guidelines mandating the disclosure of climate-related financial risks. This initiative will be accompanied by proposed legislative changes addressing ESG risks, including civil penalty provisions. Collectively, these measures signify a comprehensive shift towards increased transparency and accountability in business practices.
So, what is the impact for SME’s?
Initially, the impending changes will impact large organizations, financial institutions, and government entities. However, the flow on effect of the ISSB's mandatory directive on Scope 3 emissions disclosure places an immediate obligation on businesses, including SMEs, to monitor and report emissions to suppliers. This obligation spans various aspects of Australian business operations, involving export markets, local supply chains, multi-tiered government contracts, and access to finance.
And while emissions reduction remains a critical issue, the breadth of sought-after ESG data from suppliers is broadening to include elements that can drive improvements across a product's entire life cycle. Consequently, ESG data requirements may encompass areas such as supplier resource efficiency, recyclable design, ethical practices, deforestation, loss of biodiversity, and compliance with modern slavery conventions. Clear illustrations of this growing requirement in global supply chains can be found with Amazon and Ikea. In July 2023, Amazon mandated suppliers disclose carbon emissions, set reduction targets and report on social and governance metrics, as a prerequisite for maintaining a business relationship. Similarly, Ikea enforces supplier reporting on the sustainable use of water, waste, and working conditions, all of which undergo verification by Ikea.
Importantly, despite initial challenges in adopting ESG frameworks, there are also potential benefits. These include:
Expansion and retention of Client Base: A proactive approach to ESG not only retains existing clients prioritizing ESG factors but also attracts new clients seeking partners with aligned sustainability values. This is particularly advantageous in accessing export markets where ESG data transparency is obligatory.
Competitive Advantage: Comprehensive and clear ESG reporting distinguishes a company, which is particularly significant in government supply contracts where an increasing emphasis is placed on sustainability reporting and practices.
Investment and Capital Access: Driven by a reporting mandate on Scope 3 financed emissions, financial institutions are increasingly integrating emissions assessments into their investments and loans. Therefore, companies with the ability to demonstrate a history of ESG reporting and compliance can attain enhanced access to investment and capital opportunities.
Easier Compliance with emerging regulations: Early adoption of ESG frameworks positions a company for future regulatory compliance and assists in mitigating risks, operational efficiency, and cost savings.
As organizations recognize that their primary risk and opportunity related to compliance requirements lies within their supply chains, it is no longer a matter of if, but when, SMEs will be mandated to furnish ESG and sustainability metrics. Embracing ESG practices and frameworks now, and perceiving these client demands as opportunities rather than constraints, can empower businesses to gain a competitive edge and foster long-term growth in their respective markets.
For support in navigating ESG and sustainability demands, from risk assessment to seizing commercial opportunities, please contact us today.