Why a climate reporting framework is essential for small businesses

In the wake of Australia’s proposed law mandating climate reporting for large and medium-sized enterprises, many in the business community are pondering its implications. Treasurer Jim Chalmers believes that these new climate-related disclosure requirements will help, “maximise the economic opportunities of cleaner, cheaper and more reliable energy and manage climate change risks”.

This legislation, while initially targeting larger corporations, signals a broader shift that will inevitably impact small and medium-sized enterprises (SMEs). In my years consulting with SMEs to develop forward-looking and resilient business strategies, I have learned that leveraging Environmental, Social, and Governance (ESG) is key to successfully navigating this evolving legislative landscape and achieving long-term success. 

Understanding the ripple effect on small businesses

While the proposed law currently targets larger corporations, there will be an inevitable ripple effect for SMEs. Large companies will start demanding ESG compliance from their suppliers and partners, many of whom are smaller businesses. It’s a chain reaction where the standards set at the top will permeate through the entire business ecosystem. This chain reaction means that SMEs, even if not directly bound by the law, must be prepared to align with these emerging norms to remain competitive and relevant in the supply chain.

The future of mandatory ESG reporting

I firmly believe that mandatory ESG reporting for all businesses is not a matter of ‘if’ but ‘when’. It’s not just a trend; it’s the future of business. This legislative move is a clear indicator of the global trajectory towards more sustainable business practices. Companies without an ESG strategy are not just missing out on potential benefits; they are exposing themselves to significant risks, including investor disengagement, customer alienation and reputational damage. These are all things that can significantly hinder a business’s growth and sustainability.

Steps for SMEs: Building an ESG framework

For SMEs at the beginning of their ESG journey or those struggling with implementation, I recommend a structured approach:

Identify what’s relevant: Understand the specific climate-related disclosures that are relevant to your specific business and industry. This requires a deep dive into the unique risks and opportunities your business faces in the context of ESG.

Engage experts: Seek professional advice to accurately define climate-related risks and opportunities. This step is crucial in developing an ESG strategy that is both realistic and impactful.

Competitor and customer: Keeping an eye on your competitors’ ESG strategies and understanding what your customers value is crucial. This isn’t just about compliance; it’s about turning accountability and transparency into strategic and competitive advantage. 

Measure what matters: Set clear greenhouse gas emission targets and focus on measuring tangible outcomes, not just outputs. Avoid the allure of vanity metrics and greenwashing, and instead commit to genuine ESG efforts.

Adopt the right tools and systems: Just as the transition from paper-based to cloud-based accounting revolutionised financial reporting, a similar transformation is needed for ESG reporting. It’s about setting up the right systems, structures, and governance to ensure effective management and reporting of ESG metrics. 

The advantages of authentic ESG strategy

The advantages of robust ESG programs are extensive, extending far beyond compliance: 

• Attracting investors: In today’s market, investors are increasingly drawn to companies with strong ESG credentials. It’s a marker of sustainability and long-term viability.
• Customer loyalty: Consumers are more environmentally conscious than ever, so companies that demonstrate genuine commitment to sustainability are likely to earn greater customer loyalty.
• Enhanced financial performance: ESG-focused companies often see improved financial performance due to efficient operations and enhanced brand value.
• Competitive advantage: A robust ESG strategy can differentiate a company in a crowded market, offering a unique selling proposition.

ESG as a strategic opportunity

As the landscape of business evolves with these new regulations, SMEs shouldn’t view ESG as a regulatory hurdle, but as an opportunity for smarter, more sustainable business practices. These strategies are not just about mitigating risks; they’re about seizing opportunities. It’s about future-proofing your business. Incorporating ESG strategies is no longer optional – it’s a fundamental aspect of doing business in the modern world.

Jake Majerovic is the managing director of Thinkless Group.