To comply with incoming regulations and requests from larger customers, SMEs need more tools and guidance.
A new climate reporting framework designed for small- and mid-sized enterprises (SMEs) has been launched in response to growing demand and a dearth of supply, according to Sonya Bhonsle, Global Head of Value Chains for sustainability disclosure platform CDP.
To ensure global warming is limited to 1.5°C by 2050, it is vital SMEs decarbonise their processes and report on their climate-related progress in line with larger companies, said Sonya Bhonsle. However, there is currently a shortage of tools and resources tailored to SMEs looking to “commit to and accelerate climate action”.
“SMEs across the globe need and want to join the transition to a low-carbon economy, but the support and guidance available for sustainability reporting has often not catered for the specific needs of SMEs, which are increasingly being requested to make climate commitments and report against progress by their stakeholders and lenders,” Bhonsle told ESG Investor.
SMEs make up 90% of global businesses and more than 50% of employment worldwide, she added.
Supply chain emissions are 11.4 times higher than operational emissions, CDP noted, with many large companies asking their suppliers (usually SMEs) to measure, report and reduce their emissions.
The new framework aims to improve SMEs’ ability to report their climate impacts and strategies to their stakeholders in line with incoming regulatory requirements. It will provide a foundation for implementing streamlined reporting tools on the SME Climate Hub, a global initiative looking to mainstream climate action in the SME community.
“Taking climate action can enable SMEs to accelerate business growth; build supply chain resilience; align with shifting governmental policy and consumer expectations and strengthen brand and reputation,” Bhonsle said.
The launch follows the draft framework CDP published earlier this year, which requested feedback from SMEs and stakeholders to shape the finalised framework. Some of the changes incorporated following feedback include streamlining to represent minimum reporting, definitions for complex terminology, and more specific guidance for micro and small SMEs.
Within the next few years, smaller corporates will be expected to report on climate-related risks on a mandatory basis.
For example, the EU’s proposed Corporate Sustainability Reporting Directive (CSRD) will replace the Non-Financial Disclosure Regulation (NFRD) by 2023, requiring companies to provide a non-financial statement on a series of ESG-related factors, in alignment with the Taxonomy Regulation.
It will first apply to all large companies and all companies listed on regulated markets with at least 250 employees and a net turnover of more than €40 million. Other SMEs can expect voluntary and proportional reporting standards by 2026.
CSRD also introduces mandated EU sustainability reporting standards (ESRSs), which are currently being co-constructed by the Global Reporting Initiative and European Financial Regulation Advisory Group (EFRAG) and are expected to be adopted by 31 October, 2022.
Further, the European Commission is expected to adopt a legislative proposal requiring firms to conduct due diligence on human rights and environmental impacts across their supply chains next month.
Many major jurisdictions are formally adopting the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework, Bhonsle said.
TCFD’s recently updated guidance notes that those reporting in line with its framework should disclose Scope 3 emissions wherever possible, meaning that it is only a matter of time before this, too, becomes compulsory across jurisdictions mandating TCFD-aligned reporting.
The CDP SME framework’s questionnaire is “fully aligned” with the recommendations of the TCFD, “meaning companies disclosing to CDP are reporting in line with the TCFD and ready for incoming regulation”, she added.
Japan’s Financial Services Authority is set to expand the scope of TCFD-based disclosures for SMEs, by 2023 expanding TCFD-aligned disclosure requirements to cover all companies that submit annual securities reports.
The UK Department for Business, Energy and Industrial Strategy (BEIS) also recently consulted on mandatory climate-relating reporting for companies.
In response to the consultation, many organisations called for a wider scope of smaller companies to report under the mandate. The Institutional Investors Group on Climate Change (IIGCC) said smaller companies with under 250 employees should also be included if they are operating in “material sectors”.
Although BEIS acknowledged calls for a broader scope, the finalised legislation requires all UK-listed companies with more than 500 employees and/or a turnover of more than £500 million to produce TCFD-aligned reports from next year. Smaller companies can comply on a voluntary basis for now, but it will eventually also become a mandatory requirement for them.
“SMEs need to be able to report progress on climate action now to gain a competitive business advantage,” said Johan Falk, CEO of the Exponential Roadmap Initiative. “The climate disclosure framework provides a strong, common foundation for the development of key reporting tools on the SME Climate Hub, guided by simplicity.”