SMEs should start ESG reporting before regulation catches up

AS LISTED firms in Singapore and Hong Kong prepare to comply with mandatory environmental, social and governance (ESG) reporting in 2025 and 2026, small and medium enterprises (SMEs) are not completely off the hook. SMEs in Singapore and Hong Kong that serve listed firms in the US, UK and Australia are already being asked to provide data for their customers’ sustainability reporting.

Instead of waiting to play catch up with regulations, SMEs in Singapore and Hong Kong should make ESG reporting a priority. A recent survey by the Hong Kong Small and Medium Enterprises Association shows close to 85 per cent of SMEs agreed good ESG practices increase trust with their customers and build a positive brand image. However, the survey also revealed that 48 per cent of SMEs have not started their ESG reporting due to a lack of skills and human resources, while 40 per cent cited a lack of other necessary resources. Starting ESG reporting early will allow resource and time-strapped SMEs to take baby steps towards getting their reports right.

To the untrained eye, ESG reporting seems to involve largely non-financial KPIs. How do we arrive at these numbers? Fortunately, this non-financial information can already be found in an SME’s financial reporting.

Imagine, for a moment, that you own a small-medium cafe business in Singapore that is doing its first ESG report. Perhaps you are shipping milk from New Zealand. How much milk are you shipping? How often are you shipping it? Is the milk package recyclable? Is the milk transported by air, sea or both? Where is the milk stored before it gets into the customer’s coffee? How much milk is wasted each month? The answers to these non-financial questions impact your emissions, your carbon footprint and ultimately your ESG reporting.

Thankfully, most of the data required for ESG reporting can be found in your SME’s financial information. If there’s a robust accounting system in place, the financial data from your supplier invoices, logistics and sales systems should provide you with some of the ESG information you need.

As an accountancy firm owner who serves clients in both Hong Kong and Singapore, I find that the real challenge for most SMEs with ESG reporting is the state of their financial information. Most SMEs are resource and time-strapped, and admittedly financial accounting is not a top priority.

Without a good accounting system in place, there are gaps in financial information, which lead to a lack of non-financial information required for ESG reporting. This is why SMEs need to start ESG reporting now. This gives SMEs the advantage of taking baby steps to figure out the requirements in the reporting, their data gaps, and get their accounting system in order.

Beyond compliance, ESG reporting gives SMEs the opportunity to take a good look at how to reduce costs while reducing their carbon footprint. Going back to our example of being a cafe owner in Singapore, our ESG reporting may find that importing milk from New Zealand leaves a large carbon footprint. Perhaps sourcing milk produced in Malaysia or Japan would lower the freight costs, thereby making our business more sustainable while decreasing costs. These baby steps may result in a meaningful impact on your business’ bottom line and sustainability. It is entirely possible for SMEs to increase their profitability and responsibility to our environment at the same time.

If you’re an SME that is looking to start your ESG reporting journey, there are several steps you can take. Several government agencies and business organisations in Hong Kong and Singapore provide good resources on sustainability reporting. And as we have learnt, the quality of financial information is key in ESG reporting. Therefore, equipping your accounting team with the right training and resources will help them get your SME’s financial and non-financial reporting ready for your ESG reports. Singapore SMEs with a million-dollar turnover will have the added advantage of already being able to get some of their ESG reporting information from their regular Goods and Services Tax filing.

The key is to start now and early. Take baby steps towards sustainability reporting while you can. Because sooner or later, either regulation or the customer will be knocking on the proverbial door, with questions about the ethics and carbon footprint of your business (and perhaps your milk).

The writer is CEO of Fresh Accounting