The intensifying sustainability reporting requirements under new IFRS ISSB standards directly impact SMEs, not just large corporations. Navigating Scope 3 emissions, supply chain decarbonisation, climate risks, and climate resilience isn’t just beneficial – it’s becoming critical. It’s crucial for SMEs to embrace these strategies now in order to thrive in a landscape prioritising ESG.

The Australian business landscape is undergoing a seismic shift with the implementation of new sustainability reporting, guided by the IFRS ISSB (International Financial Reporting Standards, International Sustainability Standards Board) requirements. The focal point of most discussions has been centred on large corporations, however, there is a sector of the economy still significantly affected yet under discussed – SMEs.

While these businesses may not fall within the compliance threshold, it’s essential to understand the impacts they stand to face. As the ripples of economic implications spread, the relevance of addressing Scope 3 emissions, supply chain decarbonisation, and climate risk management will likewise increase for SMEs.

Scope 3 emissions, those emissions that arise from sources not owned or controlled by the company, often form the largest part of a company’s carbon footprint. Despite being initially designed for larger emitters, the tightening of carbon accounting under IFRS ISSB standards creates a ripple effect that will inevitably roll onto SMEs, a design feature of the top-down approach to economy-wide decarbonisation. As large corporations strive to improve their sustainability reporting, focus on Scope 3 emissions will heighten, and pressure will mount on smaller businesses in their supply chains to decarbonise.

Similarly, the trend of supply chain decarbonisation driven by larger companies’ commitments to net-zero targets, will create significant impacts for SMEs. Large corporations will likely prefer to engage with suppliers that adopt similar sustainability principles, thereby providing a competitive advantage to those SMEs that have already started integrating sustainability into their business models. This also implies an increasing necessity for SMEs to transition towards low-carbon operations, which may involve considerable costs and resources for implementation and ongoing maintenance if the emission reduction strategy is not thoughtfully designed and deployed

Business decarbonisation is also crucial factor in the financial materiality and impact materiality of climate risks and climate resilience. Sustainability reporting is increasingly affecting investment and lending decisions. Financial institutions have long been integrating climate risks into their broader risk management framework and pricing strategy – SMEs that fail to build climate resiliency could potentially find it harder (and more expensive) to access capital.

Moreover, SMEs located in sectors vulnerable to physical climate risks need to consider their resilience to potential disruptions. Businesses that successfully navigate this will not only secure their ventures in a rapidly changing climate but also grasp potential business opportunities resulting from increased market volatility.

Identifying and managing these climate-related risks will require SMEs to develop or strengthen their understanding and reporting under the new IFRS ISSB standards which can be voluntarily adopted. Although it may not currently be a legal requirement, early adaptation may offer strategic and competitive advantages, especially as pressures mount from larger businesses in their supply chains and lenders considering climate risks.

While new IFRS ISSB reporting requirements may initially appear focused on larger corporations, the broader implications should prompt a wave of change among SMEs as the ripples spread through supply chains and partnerships. Understanding and aligning to these sustainability themes – Scope 3 emissions, supply chain decarbonisation, and the double materiality of climate risks – will be integral to their continued business success.

So, SMEs should begin to explore and implement strategies around sustainability reporting and risk management. A business landscape that is progressively conscious about environmental, social, and governance (ESG) factors may soon no longer be a choice – but an expectation. With the right steps and forward thinking, SMEs can ride this wave of change towards a more sustainable and resilient future.