Driven by consumer expectations, supplier demands and regulatory requirements, it is now expected that all businesses communicate and report their environmental, social and governance (ESG) performance to stakeholders to remain competitive.

For small and medium-sized entities (SMEs) that argue they do not have the expertise, financial resources or capabilities to do this, time is running out. Aside from consumer demand, mandatory requirements for climate-related disclosures loom on the horizon in Australia, which will bring it in line with other jurisdictions, including the EU, UK, New Zealand and Japan.

From 1 July 2024, large entities that are required to prepare and lodge annual reports under Chapter 2M of the Corporations Act 2001 will need to disclose information about climate-related risks and opportunities, including their greenhouse gas (GHG) emissions. While smaller businesses are exempt, in a similar fashion to the reporting requirements of the Modern Slavery Act 2018, they will be scooped up as part of the value chain for larger businesses.

This provides accountants with a huge opportunity to work with SME clients to leverage insights across the business’s operations, identify the data needed, look for ways to reduce GHG emissions and meet reporting requests from suppliers, says Karen McWilliams FCA, sustainability and business reform leader at CA ANZ.

“It might initially be a request for GHG emissions data, but it may subsequently form part of the requirements to tender for work. And, as small businesses turn their attention to this, they'll ask their trusted adviser for help,” McWilliams says.

Understand what ESG means

Firstly, it’s important to understand what ESG is, says Cat Long, founder and CEO of Trace, a digital platform that specialises in helping businesses track their GHG emissions.

“Accountants already have access to all the data needed to measure a GHG footprint, and all they need is a framework and an understanding of what ESG means in practice for their clients,” says Long.

Measuring GHG emissions, employee engagement, customer satisfaction and how a business engages with the community are all examples of ESG issues that affect the organisation's ongoing productivity and profitability, she says.

“ESG is very broad. E is the environmental aspect, which includes carbon, water and the circular economy. Social impact can be anything from diversity and inclusion metrics to philanthropic giving, and then governance is related to the structure, policies and processes a company adopts to stay accountable to ESG metrics,” says Long.

Who is asking?

Understanding where the demand for information is coming from will help a business, as will determining what is materially important to the business, says McWilliams.

“Firstly, look at where the requests are coming from – is it from their suppliers, customers or providers of finance? What information are they asking for?” she says.

Rather than applying every potential ESG factor, different industries are expected to look at the elements of ESG that are material to their own activities and impacts, says McWilliams.

In ESG terms, materiality defines the social, environmental and governance topics that matter most to an organisation and its stakeholders – those most likely to affect the operating performance of the business.

“The next step is to look at the organisation’s operations and value chain to identify where the material risks and opportunities in relation to ESG sit,” she says.

Mapping emissions

Often the request for information will be related to GHG emissions, Long says, and for most companies, over 70% of GHG emissions come from their supply chain.

“Every company has a footprint, so I advise starting your ESG journey by understanding your GHG emissions. Luckily, it’s not as scary and costly, or time-consuming as a lot of small businesses think it is.”

Using available software that accesses data from your accounting platform makes it a lot more straightforward, streamlined, cost effective and can be used to track your progress, Long adds.

“Basically, anything you spend money on has a footprint and your actual dollar amount is a really good proxy for your GHG emissions. How much you spend on domestic travel, on electricity, on petrol, for example, can be used to estimate your footprint and help you understand where to reduce your emissions,” she says.

The next step is to engage and select suppliers with plans to reduce their emissions, because their emissions are your emissions.

Adds Long, “Accountants are well placed to help companies make informed choices about which suppliers to choose and measure their progress.”

What is ESG?

• Environmental factors: Water use and quality, air pollution, energy use, greenhouse gas emissions and climate change, raw material use, waste generation, land degradation and biodiversity.
• Social factors: Labour practices, health and safety, human rights and freedoms, wellbeing and quality of life, inclusion and non-discrimination, social cohesion and community resilience.
• Governance factors: Business ethics, bribery and corruption, anti-competitive behaviour, data privacy, lobbying activity, tax transparency and integration of environmental, and social objectives and commitments into business governance practices such as decision-making structures, performance measurement, audits, disclosure and executive incentives.