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The future of sustainability reporting for SMEs

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Sustainability accounting has become a buzzword for many accountants, but few understand exactly what it means.

Earlier this month, Saiba teamed up with Unctad (United Nations Conference on Trade and Development) to deliver a two-day webinar on “Sustainability Reporting for SMEs.”

Saiba’s Russel Ngobeni explained the role of SMEs in the economic life of the country, and the reporting challenges they face. The better their reporting systems, the better they perform as companies, as financial entities, and as corporate citizens of the country.

Saiba’s Russel Ngobeni spoke of the role of SMEs in the economy and how better reporting will improve their performance in the economic life of the country

Saiba members occupy an exalted place in the South African economy because so many of their clients are the SMEs that provide millions of jobs in the country. The better these SMEs are guided and nurtured, the better it is for the future of the country. Ngobeni warned that technology should be embraced by accountants in their quest to deliver better and more meaningful insights to their clients, and that SMEs adopting integrated reporting will be first in line to win business from government agencies and larger corporations.

It has become abundantly clear that SMEs will be required to report on more than just financial performance. The kind of sustainability reporting expected of larger corporations under the rubric ESG (Environmental, Social and Governance) will in future be expected of SMEs.

Elena Botvina of Unctad’s investment and enterprise division, presented the case for wider reporting on a range of corporate impacts, from social to environmental as well as financial.

She gave the following by way of historical background:

  • In June 2020 the European Commission issued a request to undertake preparatory work for possible EU non-financial reporting standards in a revised Non-Financial Reporting Directive.
  • In March 2021 the European Financial Reporting Advisory Group (EFRAG) set out recommendations in the development of EU sustainability reporting standards.
  • World Economic Forum released a set of universal environmental, social and governance (ESG) metrics and disclosures to promote reporting by companies on non-financial issues.
  • Value Reporting Foundation merges the SASB (Sustainability Accounting Standards Board) and IIRC (International Integrated Reporting Council) into an international organization that maintains the Integrated Reporting Framework, advocates integrated thinking, and sets sustainability disclosure standards for enterprise value creation.
  • In 2015, Member States of the United Nations adopted the 2030 Agenda for Sustainable Development.

Sustainable Development Goals (SDGs)

The United Nations Sustainable Development Goals (SDGs) were adopted in 2015 as a universal call to action, and include goals such as no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation  and affordable and clean energy, to name a few.

SDG 12 has a target of responsible consumption and production, which explicitly encourages companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycles.

Unctad developed a framework that would translate these goals into practical indicators that could be adopted by companies. For example, SDG 7 deals with affordable and clean energy. Under the Unctad approach, companies would report renewable energy as a percentage of total energy consumption during the reporting period.

Who would be the consumers of this information?

Unctad suggests the users of this information would be government agencies, capital providers, other key stakeholders and society at large. Unctad conducted more than 20 case studies in different countries, at different levels of economic development and different sizes of companies (including SMEs). What it found was that the following core indicators could be reported – regardless of the size of the company, though the most challenging areas were institutional or environmental indicators.

What are the economic indicators that accountants should measure?

Shireen Naidoo, speaking on behalf of Unctad, outlined the key indicator that form the basis of company economic reporting.

Revenue reporting: When it comes to revenue reporting, Naidoo provided the following definition: Revenue is the value generated from sale of goods or services, or any other use of capital or assets, recognised by an entity in a given reporting period.

She recommended sticking with the IFRS framework for revenue reporting.

Value added definition: Value added is defined as the difference between the revenues and the costs of bought-in materials, goods and services.

Net value added definition: Net value added consists of value added, with depreciation subtracted. In other terms, NVA is the sum of the value added to employees, to providers of loan capital, to government and to owners.

Payments to government would include:

  • Income taxes
  • Property taxes
  • Excise duties
  • VAT
  • Local rates and other levies and taxes
  • Royalties, license fees and other payments to government

Social indicators

It is clear that in future, companies will be required to provide a list of social indicators, such as:

  • Proportion of women in managerial positions;
  • Average hours of training per year per employee;
  • Expenditure on employee training per year per employee;
  • Employee wages and benefits, by employment type and gender;
  • Expenditures on employee health and safety;
  • Frequency/incident rates of occupational injuries;
  • Percentage of employees covered by collective agreements.

Core indicators in the environmental area:

  • Water recycling and reuse;
  • Water use efficiency;
  • Water stress;
  • Reduction of waste generation;
  • Waste reused, re-manufactured and recycled;
  • Hazardous waste;
  • Greenhouse gas emissions (scope 1);
  • Greenhouse gas emissions (scope 2);
  • Ozone-depleting substances and chemicals;
  • Renewable energy;
  • Energy efficiency.