SMEs could be forced to turn over utility bills under new mandatory accounting rules

Small businesses will be exempt from Australia’s new mandatory climate risk accounting rules, but may still be asked to turn over meter readings, utility bills, and other energy usage figures to their bigger business partners, draft documents show.

To increase visibility of the climate crisis and harmonise Australian standards with international markets, the federal government plans to legislate new climate risk disclosure standards, making it mandatory for major businesses to detail the greenhouse gas emissions caused by their operations.

The Australian Accounting Standards Board (AASB), the organisation tasked with developing the rulebook for those impending climate risk disclosures, released an 103-page exposure draft for consultation on Monday.

The draft plan covers Scope 1 emissions, arising from the business’ own operations, like those caused by a factory.

It also includes Scope 2 emissions, arising from the energy used to power a business’ operations, and Scope 3 emissions, or ‘indirect’ emissions caused by a business’ suppliers, workers, and customers.

Under the updated accounting rules, businesses which count over 500 employees, carry more than $1 billion in assets, and command a consolidated revenue of more than $500 million will need to disclose their climate-related risks from 2024-2025.

Businesses with between 250 and 500 employees, $500 million in assets, and $200 million in consolidated revenue will fall under the scheme in 2026-2027.

Medium-sized enterprises  — over 100 employees; $25 million in assets; consolidated revenue over $50 million — will be covered from 2027-2028.

SMEs not directly covered, but might face B2B scrutiny

The AASB said smaller businesses will not face direct coverage under the proposed accounting rules due to issues of scalability, cost, and a “lack of proportionality”.

Earlier consultations heard international financial reporting standards related to climate risk pose “a significant barrier to implementation for small-to-medium sized entities and not-for-profit private and public sector entities,” the report states.

However, small businesses may still find themselves wrapped up in the reporting scheme due to Scope 3 requirements.

The proposal suggests bigger businesses could chase smaller suppliers for relevant climate impact data, even if the small business is not directly subject to the reporting framework.

A reporting entity “shall consider its entire value chain (upstream and downstream)” when providing a Scope 3 emission estimate, the AASB states, suggesting smaller business partners involved in transportation, distribution, waste processing, franchising, and other second-order operations will be scrutinised.

Primary data, provided by those business partners, is “more likely to be representative of the entity’s value chain activity and its greenhouse gas emissions than secondary data,” the report states.

“For example, primary data could be sourced from meter readings, utility bills or other methods that represent specific activities in the entity’s value chain… Data from specific activities within an entity’s value chain provides a more accurate representation of the entity’s specific value chain activities and, therefore, will provide a better basis for measuring the entity’s Scope 3 greenhouse gas emissions.”

“Lack of awareness” among small business

Jyotika Rangel, partner at Pitcher Partners Sydney, said small businesses should be alert to incoming climate reporting rules — even if they will not be directly subject to the them.

“There is a general lack of awareness on this front for small/medium business,” Rangel told SmartCompany.

“Even among those aware, many think that they won’t be impacted at all and some think the impact is many years away and they have plenty of time to come up to speed.”

“Where a large business is a key customer, the smaller business should engage in discussions with their customer’s finance team and see how they can work together to meet both their requirements when they become mandatory,” she continued.

Peter Lawrence, partner at Pitcher Partners Newcastle, said simply reporting climate risk data to a bigger business may not be enough.

Enterprises directly subject to the reporting framework “will need data on their suppliers’ and customers’ emissions and may well require them to lower their emissions to be able to continue to do business with them,” he said.

There is some upside for smaller businesses, Rangel added.

“Businesses that move quickly to understand what their requirements will be, will be ahead of the game and it could provide a significant advantage in attracting customers who are required to provide this reporting,” she said.

Consultations on the draft will close on March 1, 2024.