Environmental reporting: why SMEs should get ahead of the curve

As the UK sets new targets for carbon reduction, larger businesses will be asked to lead the way to net-zero – but SMEs also have a vital role to play. We look at what environmental reporting means and what advantages it could offer smaller businesses.

– Before the COP26 climate change conference in November, small businesses will be encouraged to commit voluntarily to reducing their carbon emissions
– Environmental analysis can create a favourable impression with potential investors, or when bidding for supplier contracts, and help to attract talent
– The government has published guidance for SMEs on how to measure and report greenhouse gas emissions

This year is likely to be pivotal in the global drive to reduce carbon emissions and limit the impact of climate change in the decades ahead. In November, the UK will host the United Nations COP26 summit in Glasgow, bringing together heads of government from around the world with the aim of agreeing new policies to reduce the environmental impact of human activity.

In the run-up to COP26, world leaders are expected to issue new carbon-reduction pledges and undertake advance negotiations on issues such as carbon pricing and support for renewable energy sources. In recent weeks, the UK government has committed to cutting emissions by 78% compared with 1990 levels by 2035 – an update on the previous goal of a 68% cut by 2030. And in the US, President Joe Biden has unveiled plans to cut emissions by at least 50% from 2005 levels by the end of this decade, partly by ramping up investment in clean energy.

Reporting requirements for larger companies

Businesses of all types and sizes will clearly have a very important role to play in reducing UK emissions and embracing more sustainable forms of energy.

Larger firms already have to report on their carbon footprint: any company that is listed on a major stock exchange or which employs more than 500 people is required by law to provide details of their greenhouse gas emissions in their annual directors’ report. Government guidance states that such reporting should include relevant and measurable KPIs, with consistent methodologies to ensure that figures can be compared over time.

At present, there are no requirements on smaller companies to undertake this type of environmental reporting. However, ministers are set to launch a new programme ahead of the COP26 summit which aims to encourage small businesses to commit voluntarily to reducing their own carbon emissions.

Why SMEs should think about environmental reporting

James Close, director, climate at the Royal Bank of Scotland, says there are a number of potential benefits to smaller companies in getting ahead of the curve in terms of measuring and reducing their environmental impact.

“Whether the current reporting requirements for larger corporates are extended to SMEs or not, ambitious small businesses will want to demonstrate their environmental credentials,” he says. “Providing their own environment reports to key stakeholders will help them establish their credibility and track record.”

“Think about where you want to be in three to five years’ time. Look at industry best practice in terms of the environment and identify where the gaps are – and how you can address them”
James Close, director, climate, Royal Bank of Scotland

But assessing a business’s carbon footprint isn’t just about sending out the right message, “Environmental analysis first and foremost helps firms to anticipate potential risks. Climate change is already affecting the way we live and work, and the pace of this change is only going to increase in the years ahead. This means that businesses face material risks in terms of extreme weather events, potential supply chain disruption and changing consumer or customer demands. Understanding and mitigating these risks should be a vital part of any company’s strategy.”

This kind of environmental analysis can also create a favourable impression on the likes of lenders and potential investors, says Close – a methodical approach to risk management can be a sign that a business is well run and therefore more deserving of finance.

“As banks measure and monitor their carbon emissions and set targets for reduction, they will expect businesses to report their own emissions,” he explains. “Low-carbon, environmentally conscious businesses will be more environmentally and economically resilient, so their credit risk has the potential to reduce.”

Meanwhile, as the general public becomes more environmentally aware, potential employees are more likely to examine businesses’ green credentials before applying for jobs, he explains. “A more sustainable approach can also help position firms for new business opportunities. In the future, more and more third parties are going to be scrutinising your environment reporting and sustainability plans – and ensuring a strong reputation will be very good for your brand.”

This type of scrutiny could arise when a smaller firm bids for a contract from a large company or public sector body. Close says: “Most public sector procurement and many private sector procurements have expectations around environmental compliance.”

Businesses that understand their carbon emissions better will also be well placed to cut excess energy use and become more efficient – a move that should have a direct impact on their bottom line.

Where to start

The government has published guidance to help SMEs make a start in environmental reporting. This explains what kind of activity should be included in an environmental audit – for example, business travel and staff commuting – and also offers guidance on how to communicate and publicise environmental reports.

A good starting point, Close says, is to look at the longer-term strategy: “Think about where you want to be in three to five years’ time. Look at industry best practice in terms of the environment and identify where the gaps are – and how you can address them.”

Carbon calculators are available online to help businesses assess their current performance, he adds. The Carbon Trust has one available here which covers scope 1 (direct energy use) and scope 2 (purchased electricity) emissions.

SMEs can also use pro forma reports and templates to set out their carbon footprint and environmental strategy. Close adds: “It’s worth developing and adapting these templates so they are suitable for your own business and stakeholders.”

Business should set targets for carbon reduction and other environmentally beneficial changes – and then ensure they report regularly and transparently on progress towards these targets. “Integrity and consistency are key,” Close says. “Setting targets and reporting against them establishes credibility.”