Sustainability reporting has become an essential aspect of financial disclosure, reflecting a company’s environmental, social, and governance (ESG) impact. With the introduction of IFRS Sustainability Reporting standards by the International Financial Reporting Standards (IFRS) Foundation, large corporations and SMEs alike are being encouraged to enhance transparency regarding sustainability risks and opportunities.

While SMEs may assume that these regulations primarily apply to larger enterprises, the reality is different. As sustainability reporting becomes a key factor in investment decisions, supply chain requirements, and regulatory compliance, SMEs must assess their readiness to implement IFRS Sustainability Reporting. This blog explores how SMEs can prepare for these standards and what benefits they can derive from compliance.

Understanding IFRS Sustainability Reporting

IFRS Sustainability Disclosure Standards, led by the International Sustainability Standards Board (ISSB), aim to create a globally consistent framework for companies to report on sustainability-related financial risks. The first two standards, IFRS S1 (General Requirements for Sustainability-Related Financial Disclosures) and IFRS S2 (Climate-Related Disclosures), were issued in June 2023.

These standards require businesses to disclose:

• Governance structures for managing sustainability-related risks and opportunities.

• The impact of sustainability factors on business strategy and financial performance.

• Risk assessment and management practices related to sustainability.

• Relevant metrics and targets to measure performance in ESG areas.

Why Should SMEs Care About IFRS Sustainability Reporting?

Many SMEs operate under the assumption that sustainability reporting is mainly for large corporations. However, this is changing due to several factors:

1. Investor and Lender Expectations

SMEs seeking funding from banks, venture capitalists, or institutional investors may find that sustainability disclosure is becoming a prerequisite. Investors want to ensure that businesses they support are future-proofed against sustainability risks, aligning with global ESG goals.

2. Supply Chain Requirements

Larger corporations, particularly those listed in global markets, are now imposing sustainability reporting requirements on their suppliers. SMEs working with such companies may need to comply with IFRS Sustainability Reporting to maintain business relationships.

3. Regulatory Trends and Compliance

Governments worldwide are increasingly incorporating sustainability disclosures into corporate governance laws. SMEs operating in regions with strong ESG regulations, such as the EU or the UK, might soon be required to follow IFRS Sustainability Reporting standards.

4. Competitive Advantage and Brand Value

Sustainability-conscious consumers and business partners prefer engaging with companies that demonstrate responsible business practices. SMEs that proactively adopt IFRS Sustainability Reporting can build stronger brand trust and differentiate themselves in the market.

Steps SMEs Can Take to Prepare for IFRS Sustainability Reporting

While the transition to sustainability reporting may seem daunting, SMEs can take practical steps to prepare:

1. Assess Your Current Sustainability Practices

Begin by evaluating your company’s existing sustainability initiatives. Identify areas where sustainability risks and opportunities impact your business, such as carbon emissions, waste management, labor practices, or governance policies.

2. Develop a Sustainability Strategy Aligned with IFRS Standards

SMEs should outline a clear sustainability strategy that aligns with IFRS S1 and S2. This includes setting sustainability goals, defining key performance indicators (KPIs), and implementing processes for tracking and reporting relevant data.

3. Enhance Data Collection and Reporting Capabilities

Accurate and reliable data is the foundation of effective sustainability reporting. SMEs should improve internal systems for capturing environmental, social, and governance (ESG) metrics, ensuring consistency and transparency.

4. Engage Stakeholders and Build Awareness

SMEs should communicate the importance of IFRS Sustainability Reporting to employees, investors, and suppliers. Training key personnel on sustainability standards will help integrate reporting into everyday business operations.

5. Seek External Guidance and Support

Given the technical nature of IFRS Sustainability Reporting, SMEs can benefit from consulting with sustainability experts, accountants, or using ESG reporting software. Industry associations and government programs may also offer support.

6. Start Small and Scale Gradually

SMEs do not need to implement full-scale sustainability reporting overnight. Instead, they can start by disclosing a few key sustainability metrics and gradually expand their reporting framework over time.

Challenges SMEs May Face in IFRS Sustainability Reporting

1. Limited Resources

Unlike large corporations, SMEs often have fewer resources to dedicate to sustainability initiatives. They may struggle with expertise, time, and financial constraints when implementing sustainability reporting.

2. Data Collection Difficulties

Many SMEs lack the sophisticated data management systems required for sustainability reporting. Collecting accurate ESG data can be complex, particularly for businesses with manual record-keeping processes.

3. Unclear Regulatory Requirements for SMEs

While IFRS Sustainability Reporting primarily targets publicly listed companies, SMEs may face uncertainty about when and how they should comply. Keeping track of evolving regulations is crucial.

Conclusion

IFRS Sustainability Reporting is rapidly becoming a global standard for corporate transparency in ESG matters. While SMEs may not yet face mandatory compliance, the shifting business landscape suggests that early adoption can provide significant advantages. From securing investment to meeting supply chain requirements, SMEs that embrace sustainability reporting will be better positioned for long-term success. To ensure readiness, SMEs should start by assessing their sustainability practices, improving data collection systems, and seeking expert guidance. By proactively engaging with IFRS Sustainability Reporting, SMEs can future-proof their businesses and contribute to a more sustainable global economy.