4 ways to prepare for sustainability reporting changes

Small businesses will shoulder much of the responsibility for the structural, organisational and behavioural changes that will help Australia meet its net zero goals.

“The Australian economy is made up of 97% small and medium businesses,” says Fiona Reynolds, Chair of the United Nations Global Compact Network Australia. 

“The nimbleness of small business can allow for faster adaptation to eco-friendly practices, promoting resource efficiency and reducing environmental impact.”

Small businesses, Reynolds says, often serve as innovators, implementing sustainable technologies and practices that larger corporations may find challenging to adopt swiftly. 

Thanks to the upcoming implementation of the proposed, landmark International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, larger organisations will need smaller businesses in their supply chains to report on their environmental impacts and risks once the standard is approved in late 2024.

That will be good for everybody, including large corporates, small businesses, their people, and the environments and communities in which they operate.

“By fostering local economic resilience and responsible practices, small businesses contribute significantly to building a sustainable foundation for communities and, consequently, the broader economy,” Reynolds says. 

“Their collective efforts can lead to positive environmental, social and economic impacts, reinforcing their role beyond mere economic contributors.”

Monica Foerster, IFAC SMP Advisory Group Chair, agrees. “The expectations for SMEs to report on sustainability information, often due to requests from supply chain partners or finance providers, are likely to grow, resulting in new challenges to these businesses,” she says. 

“SMPs [small and medium-sized practices] are ideally placed to help SMEs tackle sustainability-related risks and to help unlock opportunities, enhance resilience and illuminate the path to becoming future fit.”

IPA Group CEO Andrew Conway believes sustainability reporting and assurance, as well as ESG, to be the greatest opportunity for the accounting profession now. 

“This is really the accounting profession’s for the taking – if we don't take up this opportunity in sustainability reporting, someone else will,” Conway says. 

“We have the opportunity right now – the IPA Group has recently prepared its first integrated report and identified drivers in relation to ESG reporting.”

This identification enables improvement – implementing the changes required to lessen the organisation’s environmental impact, mitigate climate and social risks and more. 

“We’re engaged internationally and domestically in the standard-setting process, and we’re part of the very important conversation around assurance. Because it's one thing to prepare a sustainability report, but what purpose is sustainability reporting if it’s not being assured?” Conway says.

What’s happening in Australia

While ISSA 5000 is global, the Australian Government, via Treasury, released a consultation paper Climate related financial disclosure in June 2023. The paper outlines a phased reporting requirement from 2024 to 2027.

This transition period, allowing time for businesses to develop internal capabilities and capacity to meet disclosure requirements, would also be supported by proposed modified liability settings over the same period, Reynolds says.

“While only group 1 and 2 entities would be subject to mandatory disclosure requirements in the transitional phase, other companies choosing to make climate-related financial disclosures, including to meet existing legal obligations to report material financial risks, would be encouraged to do so in line with the available Australian standards,” she says.

“Existing legislative settings and regulatory guidance is expected to be sufficient to support this outcome. The definition for each group can be found within the document. SMEs would fall either into group 3 or outside of the requirements.”

This doesn’t let SMEs off the hook. Larger organisations will favour and often require suppliers able to provide levels of assurance around sustainability matters.

A checklist for small businesses

For small businesses and their accountants, IFAC’s SMP Advisory Group has released a Small Business Sustainability Checklist. 

IFAC describes it as “a diagnostic tool designed to be tailored by each business according to its own unique circumstances, including its industry sector, lifecycle, and products and services provided”.

The checklist says embracing sustainability makes excellent business sense, particularly as it can help a business discover new advantages through enhanced processes, more efficient systems and improved controls for identifying risks and opportunities.

The checklist offers a framework covering environmental, social responsibility and governance initiatives. Not all will be applicable to every business, but each will encourage the organisation to ask relevant questions about its current practices to gain new insights.

In November 2023, the Treasury also released the Sustainable Finance Strategy consultation paper – the consultation period ended in December 2023.

“The world will need to spend between $3 trillion and $5 trillion annually to meet the Sustainable Development Goals by 2030,” Reynolds says. 

“In Australia, our transition to net zero will require significant investment from both the public and private sector. The Sustainable Finance Strategy proposed tools and policies to support sustainable finance and to reduce barriers to investment into sustainable activities.”

4 actions for accountants now

1 Know the changes

Conway emphasises the importance of accountants involving themselves as much as possible in the discussions around standards to help them prepare for the actions they will need to take on behalf of their own businesses and clients.

“If Australian standards are aligned with those of the IAASB then it means our standards not only support climate change mitigation but are also scalable as we head into the future,” Conway says.

2 Create a roadmap for the future

Accountants can position themselves for the near future by having forward-looking conversations with clients now. 

First and foremost, Conway says, accountants need to engage and build their own knowledge base around where their clients’ opportunities are as those clients explore their operating environment.

“Critically analysing the entity itself is not unlike anything an accountant would do with a small business already – it's really a strategic review built on a really good conversation,” Conway says. 

He suggests asking where the leader wants to take the business, how their personal goals 

align with the business’s social licence and how that trajectory can be achieved with respect for the business’s resources. 

“The accountant is the facilitator of the conversation to drive change – they’re building their own knowledge base to then encourage the small business owner to change their mindset. Once they've had that conversation they’re creating a roadmap for the small business, with actionable insights to take it forward,” Conway says. 

“It’s a really critical role to facilitate the conversation.”

3 Identify the entity’s value

“Part of that roadmap conversation is summing up in a sentence how the entity adds value to the community within which it operates. It doesn't matter whether it's the largest business in the world or the smallest – having those conversations to figure out that value is really important,” Conway says. 

Trying to encourage someone to think completely differently about their business model is a real challenge in a difficult economic environment when the capacity for growth is restricted. 

“But the accountant’s perspective can reduce anxiety around resources and make space to play a slightly longer game – to show them that it is possible to think outside the square and ask why the business exists fundamentally,” Conway says.

“The IPA Group did that as an organisation, and it reoriented our focus. Of course, we provide training and certification and so on. But we kept asking questions – why is that important, why do we do it? We landed on a really simple point: If we get what we do right, the accountant we support can better support a small business owner to have a better quality of life.”

4 Build networks of related and relevant professionals

Alongside the opportunity of growing into a new discipline sits risk, of course – one of the key risks for accountants is the knowledge gap. 

“It’s essential to know your limitations as a practitioner and be able to connect up with appropriate sources of knowledge. So that might be environmental scientists, or it might be other data analysts who can provide a rich view of an organisation,” Conway says.

“Accountants won’t turn into environmental scientists overnight, but we can provide connection. It's going to be important for the accountant to play the concierge or the conductor role, bringing those specialties in to provide insights to the assurance.”

The IPA webinar Unpacking The New Sustainability Standards IFRS S1 And IFRS S2, presented by BDO Partner and National Leader, IFRS and Corporate Reporting Aletta Boshoff, is available on-demand until 30 June 2024.