The growing urgency around climate change and other sustainability challenges has put increasing pressure on businesses of all sizes to rethink their operations and impact. While large corporations have the resources to establish robust environmental, social and governance (ESG) programmes, small- and medium-sized enterprises (SMEs) often struggle to navigate the complexities of sustainability.
This is where small- and medium-sized practitioners (SMPs) can play a vital role. As trusted advisors to SMEs, SMPs have a unique opportunity to guide their clients through the sustainability transition.
“The transition to sustainable practices and the reporting and assurance of sustainability information is truly a global transformation. Considering the level of global economic activity covered by SMEs, this transformation can be successful only if SMEs are part of the journey,” said Christopher Arnold, Director at the International Federation of Accountants (IFAC). “If we recall how essential SMPs are for supporting financial literacy in SME clients, we expect that pattern to repeat with sustainability literacy.”
While it is the larger entities and listed companies that will be subject to mandatory reporting and assurance requirements, SMEs are impacted as listed companies will have to report on practices in their value chain and will hold their suppliers accountable. The shift towards sustainability is also driven by stakeholder pressures and a growing recognition of the financial materiality of ESG issues.
Crowe (HK) CPA Limited saw a significant rise in the demand for sustainability consulting services around five years ago, prompting it to step into the sustainability space and offer such services. “Companies across various industries were starting to realize the importance of integrating sustainable practices into their operations to not only comply with regulations but also to meet the expectations of consumers and stakeholders,” says Edmund Li, Technical Partner at Crowe, and a member of the Hong Kong Institute of CPAs.
Indeed, with a rise in information requests both from the value chain and from finance providers, an increasing number of SMPs are offering sustainability services, a trend that is growing globally, says Arnold. “Lenders are increasingly creating links between sustainability factors and risk, and taking these into account in their lending decisions. This makes the need for SMEs to establish processes, systems, and controls around sustainability information increasingly clear. These developments also highlight opportunities for SMPs to provide a range of different services, including advisory, reporting, agreed-upon procedures engagements, and assurance.”
Kingsley Cheng, Partner at independent advisory firm PAL Advisory Limited, and a member of the Institute’s Sustainability Committee, points out that while SMEs are not always big enough to have dedicated sustainability teams, they still need to manage their risks and address customer or regulatory requirements. “This is where we can step in as experts and coaches to help them identify the right metrics, collect data, and develop tailored sustainability strategies.”
Gloria So, Partner at SW Hong Kong, who specializes in providing ESG services and is an Institute member, sees the bigger picture and thinks now is the perfect opportunity to help SMEs embed sustainability into their core strategies, and help them think about growing their business with long-term sustainability goals.
“Our goal is not just to help clients comply with regulations, but to embed sustainability into their core strategies, thereby enhancing long-term value creation,” she says. “In the future, I see SMPs not just as compliance facilitators, but as strategic partners in the sustainability transformation of SMEs.”
Building multidisciplinary expertise
As trusted advisors, SMPs today have an opportunity to not only help SME clients comply with regulations but to embed sustainability into their core strategies. To get to that point, ESG consultants have to figure out how to take a practical, value-driven approach that helps SMEs to see the commercial benefits of sustainability, rather than treat it as a compliance burden, according to Cheng.
In general, advisory firms realize that sustainability is a broad and rapidly evolving field, requiring expertise across disciplines. Some have introduced diversity into their professional mix.
“We hired from all over, and our team comprises professionals from diverse backgrounds, including corporate finance, environmental management, accounting, and even geography, to address the broad spectrum of ESG aspects,” Cheng says. “For some industries like cement, environmental knowledge especially on carbon emissions is needed. A geography background can support our team knowledge in physical climate matters. Those with an accounting and corporate finance background can communicate complex business and financial knowledge with our clients and staff from non-financial backgrounds.”
“By bringing in professionals with different backgrounds, we have broadened our understanding of sustainability and their knowledge and insights have been invaluable in shaping our sustainability services.”
Li says: “By bringing in professionals with different backgrounds, we have broadened our understanding of sustainability and their knowledge and insights have been invaluable in shaping our sustainability services.”
For larger advisors, such as Grant Thornton, their first steps were to hire a director with prior experience in ESG reporting advisory services as early as 2016. It then built a team and published an annual report focusing on corporate governance and ESG, drawing insights from listed companies in Hong Kong. “Externally, like the HKICPA, the firm is a supporting organization of ‘ESG Certified Professional Examination,’ Hong Kong’s first rule-based ESG examination, which tests candidates’ knowledge of Appendix C2 Environmental, Social and Governance Reporting Guide of the Hong Kong Stock Exchange, and other international ESG Reporting frameworks,” says Wiley Pun, Partner at Grant Thornton, and a member of the Institute’s Sustainability Committee.
And they were not alone. So says that SW hired a dedicated ESG leader to spearhead the firm’s sustainability initiatives, and drew on their knowledge of sustainability frameworks. The firm also built a cross-functional team working with partners to combine expertise in multiple areas so that they would be well positioned to offer a holistic approach to sustainability.
“By embedding ESG into existing service lines, we could provide clients with comprehensive solutions that addressed both compliance and strategic growth,” she says.
Raising awareness and driving change
One of the key challenges for both SMEs and SMPs today is staying up to date with the rapidly evolving sustainability landscape with regulations, reporting standards, and stakeholder expectations in constant flux. “One of the primary challenges we encountered was the rapidly evolving and fragmented nature of ESG regulations across different jurisdictions, which required us to stay continuously updated and agile in our approach,” So explains.
The challenge was then compounded by the fact that many SMEs and mid-sized firms, which constitutes its client base, lacked awareness and understanding of ESG’s strategic importance. “They often viewed sustainability as a compliance requirement rather than a value driver,” she says.
To overcome these obstacles, the firm invested heavily in education. “Internally, we ensured our professionals were equipped with the latest knowledge through certifications and ongoing training,” says So.
Arnold highlights the need for firms to prioritize training and development opportunities, as there will be a shortage of expertise in this area. He encourages SMPs to utilize resources that could assist them with this. “IFAC has prepared a dedicated webpage that provides material on sustainability reporting, advisory, assurance, and education and training to help practitioners upskill and build knowledge in this emerging area,” he says.
Educating clients has also become key. “Although there is a growing demand for sustainability services, there remains a significant portion of clients who are unfamiliar with ESG concepts and their implications, leading to scepticism about the value of ESG services,” argues Li.
SMPs, therefore, need to extend their service and role as sustainability educators and guides. Experts say that SMPs can help raise awareness among SMEs and empower them to take meaningful action. This could involve everything from building data management systems to supporting the integration of ESG considerations into business strategy and decision-making.
Unlocking the value of sustainability
Another common misconception among SMEs is that sustainability is a compliance burden rather than a business opportunity. As such, SMPs can play a crucial role in changing this mindset by demonstrating the tangible value that sustainability can bring.
“It’s about finding the practical benefits and helping SMEs realize that sustainability is not just about risk management, but also about creating value.”
“From our past experience, we’ve seen how sustainability can lead to cost savings, job creation, and improved reputation,” Cheng argues. “It’s about finding the practical benefits and helping SMEs realize that sustainability is not just about risk management, but also about creating value.”
By fostering collaborations with organizations like nongovernmental organizations and academic institutions, SMPs can further amplify the impact of their sustainability services by providing additional resources, expertise, and channels for engaging with the broader community. “We have external partners in the environmental engineering field when matters require deeper technical expertise. In the broader area of sustainability, we have a long-term collaboration with an NGO called Feeding Hong Kong to combat the issue of food waste through activities including volunteer work,” says Pun.
Li shares Crowe recently conducted an ESG awareness training session for an SME client, which starts with an evaluation of the client’s existing understanding of ESG principles through effective communication and administering surveys to pinpoint their specific training requirements. By pinpointing the gaps, the firm could then deliver tailored training content to help address the specific needs and gaps in the client’s organization.
The firm also shared practical knowledge and experience with staff on how they could actively contribute to the company’s sustainability objectives. “By presenting real-life examples of successful ESG initiatives implemented by other organizations, we can illustrate the tangible benefits of adopting environmentally and socially responsible practices,” Li says.
Looking ahead
As the sustainability landscape continues to evolve, Pun believes that there will be a stronger push towards decarbonization and combating climate change globally. He believes that investment and focus into renewable energy sources and the utilization of technologies such as AI and IoT to optimize resource management are likely to increase in the upcoming years.
“With the further strengthening of laws and regulations on different countries such as the Corporate Sustainability Reporting Directive for the EU countries, it could mean that SMEs may have to innovate and adapt to stricter reporting requirements, higher standards for waste management, carbon emissions in order to meet regulatory demands,” Pun says. But while this could mean an increase in operational costs, SMEs shouldn’t be put off by it but instead see it as an opportunity to open up new business opportunities and ensure long-term resilience, he adds.
Li agrees, saying that the push for sustainability will not be limited to just government regulations, but will also come from consumer demand for more eco-friendly products and services.
“In my opinion, the shift to circular economy could be a trend in the future, emphasizing resource efficiency, recycling and sustainable product design,” Li says. “Therefore, SMEs will need to invest in compliance measures which may require additional resources and expertise.”
With so many changes abreast, how can SMEs and SMPs better prepare themselves for the future? Pun suggests that since preparing and disclosing sustainability metrics and improvements might be challenging for SMEs due to their limited resources and expertise on sustainability-related topics, SMPs will need to stay ahead of the constant evolving standards while assisting SMEs to develop data collection and management processes to ensure accurate and reliable ESG data. “This way, SMEs are able to understand required sources of data for collection in the data analysis process,” he advises.
For SMEs, Li advises that they will need to start investing in compliance measures and proactive adaptation, which he argues can only lead to competitive advantages in a regulated market. “SMEs can also rethink their supply chains and product life cycles, leading to innovative practices such as refurbishing and sustainable sourcing, which might open up new market opportunities,” he says.
SMEs will not be alone in embracing change. As Arnold notes, SMPs will also need to adapt and remain relevant in order to serve a rapidly changing world. “SMPs will remain a crucial pillar of support in ensuring not only that SMEs remain competitive, but also that they future-proof their business for the transition to a more sustainable world,” he says.
IFAC’s Small Business Sustainability Checklist was developed to help SMEs maximize the benefits of incorporating sustainability into their strategy and business operations. “The objective is to demonstrate that irrespective of size, small steps can be taken to start a successful sustainability journey. We believe this is important for both SMEs and SMPs and will also be critical to attracting and retaining the next generation of talent,” says Christopher Arnold, Director at IFAC.
