ESG Reporting Unveiled: How SMEs can embrace sustainability and overcome reporting challenges

In the contemporary business landscape, sustainability and Environmental, Social, and Governance (ESG) factors have become crucial for Small and Medium Enterprises (SMEs). It has emerged as a necessity and no longer a fad.

Small and medium businesses contribute significantly to the country’s economic growth in India and globally. The increasing global participation of SMEs in trade is imperative to embracing sustainability for growth. Environmental, social, and governance (ESG) reporting has become crucial, with SMEs acknowledging the need to align operations with local and international laws. A survey by DBS and Bloomberg revealed that 92% of Indian SME business leaders consider ESG a vital requirement for their companies. It includes collaboration with vendors, suppliers, and customers, serving as a robust driver for increased ESG adoption.

Why is it important?

Adopting ESG reporting standards and sustainability practices enhances SMEs’ reputation and brand value.

Demonstrating a commitment to ethical business conduct, environmental stewardship, and social responsibility builds trust among stakeholders. Consumers also increasingly favour businesses with a positive environmental impact.

Investors, including big-ticket venture capitalists and private equity firms, are placing greater emphasis on ESG factors in decision-making. Financial institutions and funds are integrating ESG criteria into their lending and investment decisions. As consumers shop from environmentally and socially conscious businesses, SMEs aligned with these values can capture a growing customer base.

Proactive risk management contributes to long-term business resilience and can prevent financial losses. Implementation of sustainable

practices often leads to increased operational efficiency and cost reduction. Notably, more markets and industries mandate adherence to specific ESG standards for access.

By adopting ESG reporting, SMEs ensure compliance with regulatory

requirements, positioning themselves for entry into markets with stringent sustainability criteria.

Overcoming Challenges

Despite the clear benefits, they are many challenges. SMEs grapple with restricted financial and human resources, posing a substantial challenge to investing in sustainable practices. It also hinders the implementation of environmentally friendly initiatives, creating a barrier to sustainable development.

SMEs frequently prioritise short-term gains over long-term sustainability objectives. The pressure to deliver immediate results can lead to a neglect of environmentally friendly practices.

Keeping pace with constantly evolving local and international regulations requires dedicated effort and resources. Failure to stay compliant can result in legal ramifications and reputational damage. They also face issues with efficient data collection and management. Limited resources may impede the establishment of robust systems, hindering the accurate gathering and organisation of data for comprehensive sustainability reporting. The costs involved in adopting reporting frameworks and implementing measures strain the financial resources of smaller businesses.

Many SMEs also need dedicated sustainability professionals within their workforce. The absence of expertise makes it tricky to navigate the complexities of sustainability reporting effectively and hinders the accurate measurement and reporting of sustainability metrics. The lack of standardised reporting frameworks poses a significant challenge.

Fixing the challenges

Many SMEs also need dedicated sustainability professionals within their workforce. The absence of expertise makes it tricky to navigate the complexities of sustainability reporting effectively and hinders the accurate measurement and reporting of sustainability metrics. The lack of standardised reporting frameworks poses a significant challenge.

Collaborative efforts are needed to fix this. Governments, industry associations, and non-profit organisations can offer financial incentives, subsidies, or grants to SMEs adopting sustainable practices. Additionally, fostering partnerships between SMEs can allow for shared resources, creating a collective approach towards sustainability. Governments, industry associations, and environmental organisations should spearhead educational initiatives and awareness programs. Providing accessible and targeted training materials, workshops, and seminars can empower SMEs with the knowledge and understanding to recognise the benefits of sustainability and integrate environmentally friendly practices. Governments can provide tax incentives or regulatory frameworks that reward sustainable practices. Industry associations can promote the long-term benefits of sustainability, helping SMEs see the value beyond immediate financial returns.

Government bodies and industry associations should simplify and streamline sustainability regulations for SMEs. Support mechanisms, such as online resources, training programs, and consultation services, can assist SMEs in understanding and adhering to evolving sustainability regulations.

Standardised and user-friendly tools can be developed for data collection and management. Additionally, providing training programmes or subsidies for adopting data management systems can ease the challenges.

Collaborative efforts among industry associations to create shared reporting platforms or resources can mitigate individual reporting expenses. Tie-ups between educational institutions and industry associations can develop tailored training modules and certification programmers for SMEs.

Industry associations can work towards establishing clear and concise standardized reporting frameworks for SMEs. Providing guidance documents, workshops, and support channels can assist SMEs in navigating the complexities of reporting standards.

The importance of accountants

It is crucial to highlight the pivotal role of professional accountants in navigating SMEs through the intricacies of sustainability reporting. Their expertise ensures high-quality integrated information, encompassing sustainability-related and financial aspects. The sustainability reporting cycle entails eight stages, commencing with allocating responsibilities within the organizations

and extending to establishing reporting frameworks, identifying material information, data collection, transparent reporting, external verification, governance enhancement, and ongoing iterative improvements.

A systematic roadmap ensures a comprehensive and accountable approach to sustainability reporting. It guides organisations in transparently communicating their environmental, social, and governance efforts while fostering continuous improvement and long-term value creation.

A holistic approach allows stakeholders to comprehensively assess an organisation’s sustainability, facilitating the development of equitable business strategies and value creation. SMEs must embrace sustainability as guided by professional accountants through a well-structured reporting cycle.

Sustainability is now about building a resilient and responsible business model. A collective endeavour towards sustainability promises long-term benefits for businesses, society, and the planet, reinforcing the importance of SMEs in this global movement.

Authored by: SUNDEEP JAKHAR

Head of Public Affairs – India, ACCA

Sundeep Jakhar is a highly skilled and accomplished professional with rich experience of more than 15 years, working with leading names in the financial and professional services sector. Currently serving as the Head of Public Affairs – India at ACCA, he leads on government relations, public policy, regulatory affairs, and public relations for the association. Prior to his current role, he held the position of Senior Adviser within the UK government Department for Business and Trade, based in the British High Commission in New Delhi, where he played a crucial role in promoting international trade, negotiations, and government relations between the UK and Indian stakeholders in the financial and professional services sector.