Full disclosure: how much do you know about your supply chain’s sustainability practices?

Environmental, Social and Governance (ESG) reporting is currently only mandatory for listed companies in the UK, but more and more companies of all sizes are being asked to include their approach to, or outcomes of, ESG and sustainability reporting as part of procurement.

Although it might not yet be mandatory, it is only a matter of time before most companies fall under some sort of sustainability reporting requirement. In May 2024, the UK government announced that it planned to create a UK sustainability standard – a framework which supports the UK’s ambition to become the world’s first Net Zero-aligned Financial Centre.

So how can organisations begin to get ahead when it comes to developing a sustainability mindset? Is there an opportunity for SMEs to differentiate themselves from competitors and gain a market advantage? We spoke to Robert Franklin, Lead Sustainability Consultant at sustainability consultancy Eight Versa, about the benefits, for SMEs, of having a greater understanding of their supply chains and their impact.

What stage are clients at in their sustainability journey when you start working with them?

“It varies. It’s a very different landscape for SMEs compared to corporates, who have a range of external expectations and factors to consider – for instance, investors or key suppliers might require a carbon footprint measurement – and public sector contracts often mandate it.”

“Understandably, it can be difficult for clients to know where to start, so we can provide initial guidance – usually around measuring their carbon footprint. Other clients do understand what it means, but there is usually some education needed around target-setting, which is critical.”

What other motivational factors are there for clients?

“Some clients want to be doing the right thing with no external pressure or mandate; they might want to find out their true supply chain impact, for instance. Often these clients are thought leaders, and they’ve recognised the need to get ahead now.”

What are the current opportunities for SMEs in terms of sustainability reporting? What could businesses be doing to get ahead?

“The initial process of measuring and completing the carbon footprint is quite a journey, because there are a lot of different data sets needed depending on the scope, especially when you widen the lens to your value chain. So that is often a very good place to start.”

“Once completed, a carbon footprint should be updated on an annual basis, using the data identified. We start with quite high-level data sets, usually financial, which clients need to improve their accuracy and understanding of, over time. I say to clients that it should become an annual process, exactly like financial reporting: which teams are providing the data? What conversations do we need to start having?”

Should SMEs be looking at reducing all scopes?

“It really depends on the ambition of the client, but the consensus across the industry is that every company should be looking at reducing scopes 1–3. Depending on which framework a business has signed up for, the milestones will vary; for companies going down the Science Based Targets initiative (SBTi) route, for example, a commitment needs to be made to a reduction across scopes 1 and 2, set on a quantitative basis.”

“For scope 3, SMEs must commit to achieving an overall 90% reduction in emissions by a pre-defined target date (by 2050 or before), which has to be achieved on an absolute reduction basis. Focusing on Scope 3 emissions is critical because it can make up anywhere between 80–90% of a business’s total carbon footprint and focuses on the emissions associated with your value chain.  Getting access to the necessary datasets to complete an accurate Scope 3 Carbon Footprint is a challenge the industry is currently dealing with; how to reduce Scope 3 emissions is considered to be an even bigger challenge for organisations.”

Environmental, Social and Governance has become an umbrella term for a company’s non-financial reporting but, in reality, it encompasses far more: ESG aims to manage risk and impact, hold businesses accountable for their activities, and guide them on a path of continual improvement. A robust ESG proposition can drive value creation by increasing revenue growth, reducing costs, boosting employee motivation, and enhancing investment returns.

However, implementing a credible ESG strategy requires buy-in from a senior leadership team and, to be successful, often necessitates a fundamental shift in operations.

To find out more about how we partner with businesses like yours to support sustainable goals, get in touch at transform@pyndar.uk.