IPA Blog: Investing in aspiring entrepreneurs and boosting...
I believe that most countries would face the same dilemma between the pressure to grow and the pressure to reform, and...
READ MORE
Small and medium-sized enterprises (SMEs) unquestionably play a critical role in global economies and are therefore an essential component of the sustainability transformation taking place in the global business community.
The World Trade Organization reports that 95% of companies across the globe are micro, small or medium enterprises and that they provide 60% of the world’s total employment. The UN has designated June 27 as MSME Day to raise awareness of their enormous contribution and the role they play in achievement of the UN Sustainable Development Goals – a contribution without which a sustainable future cannot become a reality.
As trusted advisers to SMEs, small- and medium-sized practices (SMPs) also have a huge role in shaping the transformation to a sustainable future. The International Federation of Accountants (IFAC) has identified four key challenges and opportunities for the accountancy profession that were shared with the United Nations toward the end of 2023:
These challenges and opportunities are important to all involved in the profession, from practitioners at firms of all sizes to professional accountants in business (PAIBs).
The transformation to sustainable practices in the global business community needs input from multiple professions to be successful. The accountancy profession has an important role in leading many aspects of this transformation, and it is in this context that IFAC identified the four key challenges and opportunities.
Their impact may most immediately be felt by the largest organisations, who will be subject to mandatory reporting and assurance requirements, but the substantive change needed can only become a reality if SMEs and their trusted advisers are active in this transformation.
Interpreting and applying the four challenges and opportunities in the context of SMEs and SMPs is therefore an important stepping-stone toward both the profession and SMEs playing their part in sustainability.
Sustainability starts inside companies that treat sustainability-related matters as equivalent to financial performance-related goals and objectives. Getting to this point requires organisations to incorporate sustainability into their strategy and business operations and to develop processes, systems, and controls for sustainability-related information, or in other words, adopting an ‘integrated mindset’.
Only when this happens can sustainability be embedded into decision making and, ultimately, factored into strategic planning. One natural consequence of this change is that the value of sustainability information becomes clearer to both decision makers and the users of reported information. An integrated mindset enhances an SME’s business planning and development by providing a fully connected, holistic approach that entails the SME’s use of, and effect on, all resources that are important to its business model and its current and anticipated operations.
There will be barriers to navigate for any business undertaking this mindset change. Information silos may exist even in the smallest of organisations, with separation between finance and other teams often especially pronounced.
Siloed thinking can already impact financial reporting and performance measurement, and steps can be taken to address this, including introducing finance business partnering methods into organisations. In these methods, finance staff may sit within functional teams rather than a centralised department, with the aim of providing more direct and immediate insight into performance measurement and reporting. Similar methods for improving collaboration will be equally important for tracking and reporting sustainability-related data and metrics, including any information that may be required either for public disclosure or for the use of others in the value chain who may need to report on it.
An integrated mindset seeks to break down internal silos to ensure free and full flow of information within different parts of an organisation. This can help SMEs build a better shared understanding of value creation.
Convergence on a global baseline for sustainability reporting is important for providing consistent, comparable, and decision useful sustainability disclosures and reducing cost and complexity for organisations. The International Sustainability Standards Board’s (ISSB) IFRS S1 and IFRS S2 has brought a new era of sustainability-related disclosures in capital markets worldwide. IFRS S1 and S2 also include provisions to support application by companies with limited capabilities or experience, or those in developing and emerging economies. This includes transitional relief from some disclosure requirements when the standards are first applied.
Imposing mandatory sustainability reporting for all SMEs in a jurisdiction would create a considerable burden for SMEs in light of resource constraints and limited capacity. However, as IFRS S1 and IFRS S2 become a requirement in various jurisdictions, it is inevitable SMEs will feel their impact. Effective sustainability reporting in large entities will rely on the provision of high-quality information through their value chains, especially with respect to GHG emissions, where data from SMEs can play a critical role.
Sustainability information requests by finance providers are also already happening in some jurisdictions.
As sustainability reporting develops, there may be a call for proportionate reporting for SMEs. For example, the European voluntary sustainability reporting standard for non-listed SMEs (VSME) proposes a simple reporting tool to assist SMEs in responding to sustainability information requests they receive in an efficient and proportionate manner.
It is important for SMEs to begin taking steps to have readily available, relevant, and reliable sustainability information, even at this early stage.
The IAASB’s International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, along with the IESBA’s forthcoming international ethics and independence standards for sustainability assurance and reporting, are intended to provide a global baseline for high quality assurance, ethics, and independence for sustainability assurance practitioners. Without high-quality assurance, sustainability disclosures will not be on par with financial information.
More specifically for SMEs, who may have to report information—with assurance, in some instances—to entities up and down the value chain, their SMP assurance providers will need a high-quality, internationally recognized standard for providing such assurance.
Differing assurance, ethical, and independence requirements could create added complexity and confusion among investors and other users of assured sustainability information. In its comment letter responses to both the IAASB and IESBA, IFAC has called on both boards to provide scalable requirements and application material suited to the SMP and SME environment, as well as larger entities. IFAC’s Small and Medium Practices Advisory Group has been proactive in providing feedback on consultations for these standards.
Finally, regulators must provide appropriate oversight and enforcement over all assurance practitioners—be they firms in public practice or other service providers—to ensure high-quality outcomes for stakeholders. Such a level playing field for assurance provides SMPs with the best opportunity to support SME clients with assurance in this area and ensures their knowledge and relationships can be best utilised in the public interest.
For users of sustainability information to rely with confidence on what companies report, the same quality and same standards should apply to all assurance providers, but this must be done in a proportionate way to unlock the value SMPs can deliver.
As noted, sustainability starts with a mindset change—and any change like this needs to be built from the bottom. The start of the journey is helping SMEs understand the business case for sustainability. Only in this way will they be able to see the compelling case for transformation.
SMPs have a critical role to play because of their knowledge not only on delivery of services, but also in education. This journey starts early, and the support of professional accountancy organisations is critical.
The existing competencies of staff in SMPs leave them well placed to expand support for SMEs in this area, but they must look to build these skillsets with ESG knowledge so they can themselves be thought leaders for SMEs.
Collaboration will also be critical as SMP staff themselves will not necessarily be able to acquire all of the skills they need to deliver the sustainability services SME clients will demand. SMPs will therefore need to build external relationships and work effectively with experts from other professions.
Research and advocacy on sustainability reporting and the development of best practices for larger entities is already extensive, but it is imperative that the voice of SMEs in the debate is not lost. The SME reporting experience will likely begin with requests from the supply chain or finance providers, so research into what constitutes high-quality, proportionate disclosure in that context is important for ensuring greater effectiveness and added value.
Noting the important role SMPs have in capacity building for SMEs and understanding it is difficult to know where to start for SMEs embarking upon a sustainability journey, IFAC developed a Small Business Sustainability Checklist.
This is a diagnostic tool designed to be tailored by each business to its own unique circumstances, including its industry sector, lifecycle, and products and services provided. It lists a comprehensive range of initiatives and actions to be considered in terms of environmental, social, and governance (ESG) factors.
IFAC produced the checklist in recognition of the importance of SMEs as drivers of economic and social development and the sustainability transformation taking place globally in business and the accountancy profession.
SMPs are ideally placed to call on deep business knowledge and expertise to support SMEs on their sustainability journey using this tool. As trusted advisers, they can play a central role in capacity building.
SMPs are also strongly encouraged to use the checklist to guide their own journey and consider their strategy, policies, and procedures on sustainability. Championing sustainability among their clients is only possible if they take the lead, and there are many benefits for SMPs themselves. Among these is the increasingly critical role sustainability plays in attracting and retaining the next generation of talent.