How to get started with sustainability and emissions reporting

Larger businesses are increasingly shaping their engagement and sustainability strategies around reporting standards that will soon come into force. Small and medium-sized businesses (SMEs) in Australia should be developing their carbon emissions reporting capability to better engage with their clients and customers that are grappling with impending mandatory rules, says Sonya Sinclair, founder and Director of Eco Risk & Consulting.

“It’s about engagement. For big businesses, such reporting will soon be mandatory, but for small businesses it is often expected, too,” Sinclair says.

“For most businesses I deal with, it’s not yet mandatory for them. But they know they need to communicate to investors, or to employees, or they’re being asked through their tenders, about their strategy around sustainability.”

For Australia’s largest organisations, mandatory sustainability reporting will likely take effect within the next 12 months. At that time, if they haven’t already, those organisations will begin looking through their supply chains for businesses that can align their reporting to satisfy Scope 3 requirements.

What is Scope 3?

To appreciate the impending trickle-down effect of emissions reporting from large to small businesses, it’s important to understand a few definitions.

Eventually, likely within five to 10 years, businesses of all sizes will have to report on Scope 1, 2 and 3 emissions.

• Scope 1 encompasses direct emissions from sources controlled by the business, such as fuel in fleet vehicles, manufacturing of materials and production of the business’s own electricity.
• Scope 2 refers to emissions from purchased energy, typically generated at a power station.
• Scope 3 is where things get tricky. It is all about emissions from across the organisation’s value chain, including outsourced activities. That’s where smaller businesses come into the picture.

Large organisations that are having to report on their emissions will also require emissions information from businesses they employ.

For example in mid 2023, Coles announced a supplier engagement target of 75% that required its suppliers to have “science-based emissions reduction targets by the end of June 2027”.

“We’re going to start seeing these sorts of announcements accelerating, partly because the large companies are not going to have a choice,” says Dr Steven Burch, lecturer in Accounting at the University of Tasmania, where the Tasmanian School of Business and Economics runs an Undergraduate Certificate in Climate Accounting.

“This will draw in any entity that wants to deal with large organisations. The demand for emissions information will increase dramatically over the next five years.”

Incremental steps to get emissions reporting right

It’s important for small to medium-sized enterprises (SMEs) to recognise that their sustainability reporting need not be immediately fully operational, Sinclair says.

“SMEs are going to have to start off by understanding the key terms and the relevant data. You might just start with energy and waste, then add other elements such as air travel once you’re ready,” she says.

“I read a report the other day from a smaller business that talked about how they have started the process, but they’re only in their early days. That’s perfect. Instead of thinking they need all the data first, they have done some groundwork, worked out what pillars are relevant, and communicated their commitment so far.”

Start with a blank page, Sinclair says, and add data you’re comfortable with. Then communicate your intentions and move forward from there.

That commitment is not just important to satisfy the reporting needs of larger companies, Burch says. It’s also a vital signal to the younger generation of potential employees who are deeply interested in working for a business that demonstrates such commitment, and it’s important information for potential investors.

“From an accountant's perspective, we’ve got these proposed new standards that basically formalise sustainability reporting and assurance, so it’s now very similar to how we’re reporting on financial information. In the past, this has all been voluntary. That is all changing,” Burch says.

“You’re going to have to prepare information to a high standard using basic accounting principles such as relevance, completeness, consistency and transparency.”

Where should an SME start?

For small businesses, a good place to start is the latest version of the National Greenhouse Accounts Factors report, which helps businesses and individuals to estimate greenhouse gas emissions, Burch says. It offers various simplified ways to calculate greenhouse gas emissions from specific sources.

There are also several pieces of software, apps and calculators that help to estimate or measure carbon output, including Terrascope, Cogo and SME Climate Hub. A tech business called Sumday, based in Burch’s Tasmanian home town of Burnie, offers carbon accounting software for businesses.

The most important message for small businesses, Sinclair says, is that it pays to start now. Larger businesses, potential employees and investors are likely already expecting some sort of messaging around emissions reporting from all businesses they deal with.

“At some stage soon, you’re going to need to have your own data for someone in your value chain,” she says.

“Whether that data is in an app, whether you’ve brought in a consultant, whether your business has a sustainability manager or whether you’ve got a sustainability specialist on your board, you’re going to need to demonstrate some sort of governance around emissions.”

Burch says there is a great opportunity for accountants as mandatory reporting rules come into effect.

“It’s an exciting change,” he says. “I’ve been in the area of sustainability accounting for more than a decade and I find this is an exciting time. It will be very interesting to observe how this all plays out over the next few years.”