The Australian Sustainability Reporting Standards (AASB S2) is now enshrined in the Corporations Act 2001 and will mandate businesses above a certain size to report on their environmental impact and how they manage climate-related risks and opportunities.

These standards aim to systemise climate-related reporting by requiring a broad set of companies to disclose meaningful, comparable information about their environmental and governance practices. The social component has been purposefully excluded and will be mandated in due time. Together, these aspects relate to ESG, which stands for Environmental, Social and Governance.

Set to roll out in three stages, the standards will first apply to large companies commencing on January 1, 2025. This phased introduction allows businesses time to adapt, but the broader implications of these regulations extend well beyond their immediate scope of activities.

Implications for Smaller Businesses

While small and medium-sized enterprises (SMEs) are unlikely to be included within the legal requirements for annual sustainability reporting, they are not entirely insulated from its effects. Many SMEs operate as suppliers, contractors, or partners to larger companies bound by these new regulations.

Large corporations will rely on data from their supply chains to inform their mandatory reporting exercise, meaning that smaller businesses may be asked to provide information about their environmental impact, starting with greenhouse gas (GHG) emissions.

Greenhouse Gas Emissions and ESG Data

Under global standards, emissions are referred to as either Scope 1, Scope 2 or Scope 3. The latter refers to supplier emissions and will be requested by large companies to provide full visibility into the total emissions generated to enable their own activities. Operators in those supply chains will need to undertake a similar exercise and capture / report on their Scope 1, 2 and 3 emissions. This means SMEs may receive requests for detailed information about any capital goods (in the form of assets), their energy use, and overall carbon footprint, all of which will facilitate these calculations.

ESG data requested by customers is unlikely to be limited to GHG reporting and, as part of other sustainable initiatives, businesses may be asked to provide a broader set of ESG data, such as policies around social responsibility, waste management, and ethical sourcing. This shift underscores the interconnected nature of sustainability, where the practices of one business can influence the performance of another.

Industry factoring GHG as part of their supplier decisions

For companies engaged in contracts or projects with multinational corporations or large enterprises, these requirements have far-reaching consequences. Businesses may need to supply data not only on their internal operations and assets, as well as the environmental impact of any products supplied as part of a given project.

This implication requires companies to adopt a dual perspective:

Internal Improvements: Set up a system and business practices to be able to report on their environmental impact.

Supply Chain Assessment: Work with their suppliers to capture their own Scope 3 emissions. This in turn will allow companies to identify GHG hotspots and potentially re-evaluate their supplier base in light of this information, thereby contributing to better overall outcomes for the finished product.

Opportunities for Innovation and Competitive Advantage

While these requirements to start collecting and sharing data that has never been tracked before may seem daunting, they also present opportunities for innovation and growth. Early adopters that quickly develop the ability to provide detailed ESG data will be better equipped to leverage this data to adopt more sustainable practices, thereby decreasing their overall greenhouse gas emissions and gaining a competitive edge by aligning with the growing market emphasis on sustainability. Such companies will be well positioned to established themselves as preferred partners in their industry.

As consumers and businesses increasingly prioritise environmentally responsible products and services, being prepared can foster trust and strengthen market presence.

The essential role Industry plays in education and collaboration

To navigate these changes effectively, the industry has a key role to play; they must prioritise education and industry collaboration. Addressing data gaps at an industry level is a critical first step to support players in meeting new requirements.

By sharing knowledge and resources, industry groups can equip businesses with the tools they need to adapt to the evolving landscape. This collective effort benefits everyone involved:

  • SMEs: Gain confidence and capacity to meet reporting requirements.
  • Clients: Receive solutions that align with their environmental goals.
  • The industry: Establishes a reputation as a forward-thinking and responsible sector.

Preparing for the Future

The introduction of the Australian Sustainability Reporting Standards highlights the importance of proactive preparation. By getting the ball rolling now, businesses can use this critical period to familiarise themselves with reporting expectations from key customers, implement sustainable practices, and set themselves apart.

This preparation ensures they can respond effectively and confidently when the need arises, avoiding the risk of being caught off guard.

A Broader Vision for Sustainability

The Australian Sustainability Reporting Standards are more than just regulatory measures—they represent a broader vision for transparency, accountability, and shared responsibility in guiding government and private markets to one objective. Businesses of all sizes have a role to play in achieving this.

For SMEs, the shift to sustainability reporting is an opportunity to lead by example and demonstrate their commitment to responsible practices.

By embracing these changes, not only do businesses meet immediate demands but also create long-term value for themselves, their clients, and the environment. We encourage SMEs to consider both the challenges and opportunities that the AASB S1 and S2 standards present.

As of September 2024, 30 countries have or are in the process of incorporating these standards into their legal or regulatory framework. This serves as a reminder that sustainability is no longer optional but an integral part of doing business.

FIND OUT MORE ON THE AUSTRALIAN ACCOUNTING STANDARDS BOARD DIGITAL PORTAL: https://standards.aasb.gov.au/