Sustainability financial reporting is coming, we just don’t know when, how quickly, or the exact details. But in South Africa, we have experience of how it might impact non-listed companies and SMEs, in the shape of BB-BEE compliance, and its cascading requirements.
We can already start sketching the outlines of ESG reporting in South Africa by looking at the direction of travel of some of the global leaders, especially in Europe and the US. Regulators in later adopting countries will surely benefit from the work done by the early adopters – especially when grappling with the complexities.
One of the biggest challenges (in an already challenging situation) is reporting on scope 3 greenhouse gas emissions (GHG). These are the indirect emissions created by an organisation’s supply chain that impact its overall figures. Examples include the emissions resulting from goods and services from a third-party provider, as well as how products and packaging are disposed of. If you scratch the surface, many of the sustainability targets that companies publicise, omit scope 3 emissions. Yet reporting on and reducing these emissions is essential to reaching true net zero by 2050, in line with the Paris Agreement’s science-based targets.
It is clear that, for companies to accurately report all their emissions, and their progress to net zero, it is necessary for them to get input from their up- and downstream suppliers. This sounds very familiar to anyone doing business in South Africa. Could ESG reporting around the world mimic BB-BEE reporting in South Africa, and have a similar unintended consequence for unlisted, and especially small and medium-sized, businesses?
In the same way that large listed companies’ BB-BEE obligations cascade to their suppliers – resulting in onerous admin and paperwork for them – ESG reporting obligations are likely to filter along the supply chain. This will transfer a reporting obligation onto non-listed companies and SMEs – if they want to keep their big clients, stay in business and grow. And if you are part of an international supply chain from South Africa, this could be coming sooner than you think!
It is obviously unfeasible for most SMEs to spend time and money on specialist consulting firms to report accurately on their GHG emissions. So there will need to be a smarter, quicker way to report emissions data that is still trustworthy, auditable and accurate. Ideally, ESG figures need to be budgeted, forecast and reported on alongside traditional financial data – avoiding duplicate systems, data siloes and doubled-up efforts. This also needs to be quick, easy and accessible to avoid adding time to budget cycles that are already under pressure.
AI to the rescue?
How SMEs source the ESG data to input into their reports is an interesting question. Will we see the emergence of online directories offering benchmark data for emissions – as we do with the cost of petrol for travelling salespeople? Or perhaps this is an ideal use case for artificial intelligence, where data that already exists, or is easy to measure, is used as a proxy to calculate personalised, accurate emissions data for each SME.
As published in Accountancy SA - June 2024
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