Although small- and medium-sized enterprises (SMEs) may not be directly subject to the standards issued by the International Sustainability Standards Board (ISSB), they play a crucial role in the overall value chain. SMEs, as business partners, will encounter touchpoints where their customers, often listed companies subject to the ISSB, expect them to get on board as well. In order to prepare for the demands and expectations ahead of the road, it is advisable that SMEs familiarize themselves with this market development, as well as the context on why their customers increasingly have certain requirements, including specific data.
Context
Early preparation is key and should not be overlooked. With the November 2023 announcement from the Hong Kong Stock Exchange (HKEX) that the implementation of the Listing Rule amendments (informed by the IFRS S2 Climate-related Disclosures from the ISSB) will be postponed to 1 January 2025, it is advisable for issuers to take advantage of this additional time to ensure they are ready when the implementation date arrives. It is important that companies, including SMEs, do not underestimate the time required to understand the expectations and implications of the standards, onboard and enhance the skills of relevant internal stakeholders, as well as implement necessary actions to achieve readiness for mandatory reporting in line with the ISSB.
How to get prepared
How SMEs can get ready for the upcoming ISSB requirements is similar to how a listed company would prepare themselves.
A key data point SMEs can expect to be asked on will be related to Scope 3 emissions, which refer to indirect greenhouse gas emissions that occur in an entity’s value chain. For listed companies, this includes their suppliers, such as the direct emissions of SMEs. Therefore, it is advantageous for SMEs to acquire an understanding of their own emissions. This includes factors such as, how are emissions currently calculated; what are the data gaps and challenges to obtaining more complete data; and what are the opportunities to enhance data accuracy.
As Scope 3 data often involves multiple stakeholders and departments, SMEs can engage in discussion to align with corporate partners and customers on the specific data they are seeking, as well as consult and work together with internal departments to develop more robust data measurement and management practices. During this process, SME data owners will start to encounter terms such as “spend-based” and “Category 15” – they can begin familiarizing themselves with these terms in order to speak the same language as their corporate partners who will be often using this kind of terminology to communicate their data needs in relation to Scope 3.
In addition to Scope 3, SMEs should be mindful that more and more companies are aligning their strategy to net zero. Net zero entails decarbonizing operations through the value chain, where SMEs play a significant role, in order to achieve zero emissions. A company’s plan towards net zero come in a range of forms such as roadmaps, transition plans, and targets. Under targets, many companies are now setting science-based targets, where they undertake operational changes to actively reduce emissions. These science-based targets are relevant to SMEs, as large corporates are increasingly committing to Scope 3 targets, whether that is a direct target requiring suppliers to also get on board and take action to lower emissions, or having the supplier set their own science-based target.
Putting both Scope 3 and this science-based target together, aside from data collection, SMEs will need to consider what practical actions in the short, mid, and long-term they can take to decrease their own emissions. This is not simply for the sake of decreasing emissions, but also to give the SME an edge. SMEs that have a plan for collecting relevant data, decreasing emissions, and an understanding of the ISSB requirements may be more attractive business partners to large corporates that are advancing in their own environmental, social and governance (ESG) journey, and seeking out partners who can work alongside them in their strategy.
SMEs that wish to take it a step further could gain an understanding of the overall requirements a listed company has to comply with by taking a look through the latest ISSB requirements and HKEX Consultation Paper. From one angle, this allows the SME to put itself in the shoes of its customer and gain insight on what is driving the customer’s needs. This understanding can be further enhanced by looking through the sustainability reports issued by the SME’s customers to take note of their ESG focus areas, as well as ongoing and future actions towards Scope 3.
Expanding on this angle, an SME could begin anticipating the demands from its customers and positioning itself ahead of fellow SMEs in catering to those needs. Finally, by having an understanding of what listed companies are required to act on and disclose, the SME is equipping itself on any future requirements targeted at SMEs.
Our observation
Through our interactions with clients spanning various industries, we have observed a growing trend towards more stringent supplier requirements. Responsible supply chain management is often a material topic for these companies, and they are increasingly holding higher expectations on their suppliers’ ESG performance and policies.
Overall, it is important to recognize that this goes beyond a mere reporting exercise or keeping in step with market trends. It is also a proactive measure that helps future-proof a SME and better positions it to win future opportunities. As the number of companies gearing up for the ISSB requirements in Hong Kong and beyond continues to rise, SMEs stand to benefit by following suit.
This article was contributed by Cyrus Cheung, Partner, ESG Disclosure and Consulting at PwC and Chairman of the Institute’s Sustainability Committee. Natalyn Pow, Senior Associate, ESG Services, also contributed to this response.
