In an era where climate change is at the forefront of global initiatives, evolving climate legislation is echoing through the business world. For small and medium-sized enterprises (SMEs), understanding the nuances of this regulatory landscape is essential. It’s not just about maintaining compliance; it’s about securing a competitive stronghold in a market where sustainability is not just appreciated but expected.
SMEs and the Current Regulatory Landscape
The fabric of climate disclosure legislation, initially tailored for bigger corporations, is progressively encompassing SMEs – signifying a transition to where size doesn’t preclude scrutiny. For SMEs, especially those within the supply chains of larger conglomerates, adopting a more transparent approach to reporting climate impacts is becoming less of an option and more of a necessity.
A notable catalyst in this evolution is the European Union’s Corporate Sustainability Reporting Directive (CSRD). It casts a widening net that encompasses businesses with as few as 250 employees. This expansion marks an important shift, spotlighting the increasing relevance of mid-sized businesses in comprehensive sustainability reporting.
Breaking Down Key Climate Legislation by Region
To help you navigate the regulatory maze, here are some landmarks in climate reporting frameworks and regulations that you should be aware of:
1. US SEC Climate Disclosure Rule: Introduced in 2022, this proposed rule was crafted in response to the demand for standardized climate risk information. It mandates publicly listed companies in the US to disclose their physical and transition climate risks, along with their Scope 1, 2, and in some cases, Scope 3 emissions (if material to the company or included in reduction targets). Measuring Scope 3 presents a challenge for many businesses because it encompasses the indirect emissions from their value chain–which can constitute up to 97% of a company’s total emissions.
2. EU CSRD: This directive expands upon its predecessor, the NFRD (Non-Financial Reporting Directive), and will cover over 50,000 companies with significant operations in the EU, regardless of where they are based. Other criteria include businesses with at least 250 employees, €20 million in assets, or €40 million in turnover. The focus? A broader sustainability disclosure that includes Scope 3 emissions and supply chain data.
3. UK Streamlined Energy and Carbon Reporting (SECR) Framework: Applicable primarily to large UK companies and LLPs, this framework requires businesses to report their greenhouse gas (GHG) emissions, energy consumption, and actions taken to improve energy efficiency – promoting informed decisions based on clear, comparable information. SECR strives for a balanced approach, streamlining requirements to alleviate reporting burdens while aligning with international reporting frameworks.
4. California Climate Corporate Data Accountability Act (SB 253) and Climate-Related Financial Risk Act (SB 261): These bills aim to elevate corporate accountability in terms of climate impact. SB 253 requires major companies in California to publicly disclose their GHG emissions, encompassing Scope 1, 2, and 3, while SB 261 mandates businesses to report climate-related financial risks and mitigation strategies. Together, they enhance transparency and facilitate the transition to a resilient, low-carbon economy.
5. International Sustainability Standards Board (ISSB) Guidelines: With many countries having varying disclosure requirements, the ISSB aims to be the common ground with its new guidelines. The IFRS S1 seeks to provide a universal framework that ensures consistency and comparability in sustainability disclosures across jurisdictions, with the IFRS S2 focused on climate-specific requirements. The inclusion of Scope 3 emissions is noteworthy, reinforcing the need for companies to be diligent and comprehensive in their reporting.
The Domino Effect of Climate Disclosure Mandates
While initial regulations have primarily focused on larger entities, SMEs are feeling the ripple effects of major climate legislation and corporate commitments to climate targets. Instances such as the U.S. government mandating disclosures from its significant suppliers reflect a wider trend where organizations, beyond mere compliance, are intensifying demands for climate data across their supply chains to meet sustainability objectives and manage risks. This interconnected ecosystem, charged by a blend of regulatory imperatives and voluntary commitments, is steering businesses of all sizes to engage in a collective effort toward corporate responsibility. The growing involvement of SMEs signifies not only a broadening of the climate action landscape but also an evolution of business practices in alignment with the global shift toward sustainability.
For SMEs, the implications of this shift present some challenges. Current legislation mandates larger corporations to report Scope 3 emissions, in turn, requiring Tier 1 SME suppliers to report their Scope 1 and 2 emissions. However, there’s a growing necessity for SMEs to proactively engage with Scope 3 emissions. This is not just about future-proofing against potential regulatory changes but also about understanding and managing climate-related financial risks. These indirect emissions, though not yet mandated, are integral to a holistic view of environmental impact and can significantly influence SMEs’ relationship with their larger partners and overall market positioning.
The Road Ahead: How SMEs Can Tackle Comprehensive Carbon Reporting
Navigating through the complexities of the evolving regulatory environment can also present opportunities for SMEs. Adopting a forward-thinking approach to emission reporting can become a competitive advantage, ensuring compliance and securing their place as valuable partners in a business landscape that increasingly prioritizes sustainability and multi-tier transparency.
As societal expectations shift, stakeholders increasingly anticipate businesses to champion sustainability initiatives, taking meaningful actions to protect the environment. This has turned into a demand for the integration of environmental, social, and governance (ESG) considerations across all operations, including the upstream and downstream supply chains. Even for SMEs, weaving ESG concerns into their business strategies has become imperative to align with the broader objective of achieving net-zero targets.
For mid-sized companies yet to delve into carbon reporting and accounting, now is the time to start. Taking these steps will help make your journey a success:
1. Embrace your community: Join sustainability-focused groups and associations, such as the UN’s SME Climate Hub, to gain access to valuable resources and guidance, like this framework from the CDP. Share best practices and learn from others’ experiences to guide you in meeting climate disclosure requests, setting and achieving emissions targets, and creating your own climate strategy.
2. Leverage technology to simplify emissions reporting: Start by utilizing tools that assist in measuring and reporting your direct (Scope 1 and 2) emissions, which are currently the primary requirement for SMEs. Additionally, consider exploring platforms that help calculate your indirect (Scope 3) emissions. While not yet mandated for most SMEs, understanding and managing these emissions plays a crucial role in managing financial risks for both you and your clients and preparing for the future expansion of climate legislation.
Climate impact isn’t exclusive to large corporations. SMEs, despite their smaller footprints, play a critical role in reducing carbon emissions and shaping sustainable business practices that enable long-term resilience and growth. By prioritizing ESG concerns, SMEs can unlock tangible business benefits such as revenue growth, risk mitigation, and a fortified brand reputation. As the saying goes, “The future belongs to those who prepare for it today.”
Ready to enhance your carbon reporting? SupplyShift’s suite of solutions can guide your path to regulatory compliance and sustainable growth. Get in touch today.