As a priority concern, sustainability is no longer the exclusive domain of large and multinational corporates (MNCs) as a growing number of small and medium enterprises (SMEs) are also doing their bit to advance the agenda. While there are gaps in resources and knowledge in their implementation of environmental, social and governance (ESG) principles, these SMEs remain earnest in their endeavour.

Enlightened companies are aware that best practices, as far as sustainability is concerned, should be extended to their supply-chain partners to have any lasting impact. Asian regulators, such as those in Singapore, Japan and Australia, are developing climate-related disclosure frameworks, and such initiatives are drawing large corporates towards ESG-compliant partners, producing a knock-on effect on the SME segment. These partners need to meet sustainability requirements to maintain business relationships.

Still, SME enthusiasm towards sustainability disclosure remains tepid when compared to MNCs. According to the Climate Action Progress report compiled by MSCI, Asian SMEs’ participation in Scope 1 to Scope 3 disclosure is generally lower than that of MNCs, which can be due to the lack of urgency on the part of regulators to step up the effort. In South Korea and Australia, the discrepancy is more than 50%. On top of that, surveyed SMEs are much less prepared to assess the progress of their respective ESG journeys. This lack of knowledge of ESG parameters, as well as resources devoted to the endeavour, is likely to become a barrier to implementing sustainability improvements.

SME Climate Hub, a United Nations-backed initiative, has also identified the lack of government policies and funding as two major hurdles facing SMEs in pursuing climate action, noting that its survey finds that 73% of respondents need subsidies to commence and accelerate emission reduction efforts. As well, more than half of them seek more emission measurement and monitoring tools to facilitate climate action within their respective businesses.

Service providers

With a shoestring budget devoted to sustainability, a typical SME finds it extremely difficult to make reporting and operational adjustments. ESG service providers can help by broadening the scope of their services to cater for the specific situation of SMEs.

Zuno Carbon is one of those ESG data providers who have altered their strategy to service companies in the early stages of their sustainability journeys. In addition to collecting carbon-related data, the start-up prepares compliance-ready sustainability reports for SMEs, along with customized recommendations, to guide corporates towards better sustainability practices.

Last year, Zuno Carbon partnered with the Singapore government to launch the Group-Based Upgrading (GBU) programme, which aims to ease the cost burden of SMEs in utilizing external carbon-tracking tools. This year it extended the strategy to offer concessional rates to SMEs through a government-backed programme called Advanced Digital Solutions (ADS).

“When it comes to SMEs, there’s no real pressure from the government at the moment because they’re not listed, and don’t necessarily have private investors or private equity firms, so the driving forces can be quite varied,” shares Hari Nair, co-founder and chief executive officer of Zuno Carbon. “That’s why I think programmes like GBU and ADS are quite helpful because, regardless of the intention, it gives [SMEs] the financial incentives to start doing this.”

Apart from having financial barriers reduced, Nair believes SMEs’ growing appetite for sustainability is grounded on two factors – a higher chance of expanding overseas through green premiums and eagerness to live up to market expectations. “Even if there’s no regulation, [SMEs] are a bit worried about being left in the dust, so they want to make sure they keep up with their peers. The whole market is pushing themselves up.”

When it comes to ESG data collection, Nair says there are four stages where SMEs need guidance – understanding the regulation requirement, delivering tech support, defining ESG metrics, and visualizing data into meaningful findings. As newbies to ESG, SMEs need guidance to make sense of the procedures and, ultimately, capitalize on the efforts, he stresses.

Frictionless process

Considering that SMEs lack in-house experts and hands-on experience in ESG, Zuno Carbon deploys sustainability experts to provide training workshops and automates workflows through artificial intelligence to make the process as frictionless as possible. In an effort to ease the complexity, Nair also emphasizes the importance of combining data collection and report generation into one; this will spare SMEs from having to juggle between two different platforms.

In making recommendations to SMEs on their sustainability approach, Zuno Carbon makes it a point to offer solutions that don’t require major changes to their current operations so as to minimize the costs.

“It doesn’t always mean cutting out, sometimes it means looking at your operation and optimizing it themselves,” explains Nair. “For SMEs, it is more on the supply chain as well as optimizing operation, not so much in investing into new things.”

He cites the case of a Malaysian power plant operator, where enhancing the efficiency of its existing turbines will result in 20% reduction in emissions.

Zuno Carbon has onboarded more than 12 SMEs to its government-backed financial incentives programme, and is set to add 15 more participants this year.

“It’s going to be more accessible for SMEs because the global reporting initiative is shifting their focus to see how to serve SMEs with a much more palatable version of reporting,” Nair shares. “The mandate will come at some point. If there’s a national net-zero goal, then every organization in that country needs to comply with that.”

“I don’t think it is a question of them wanting to do it, but they have to do it, and the ecosystem is making it easier for them,” he adds.

All this underscores the need for SMEs to obtain support from the government, ESG advocates and business partners to be able to contribute to the cause of sustainability.