In the current macro and geo-political environment, the goal of remaining competitive is complicated by rising interest rates, broad cost escalation, supply chain unpredictability and the rapid change flowing through many industries from digital transformation. Overlaying all these potential hurdles is the spectre of inevitable Environmental, Social and Governance (ESG) compliance requirements and what this looming management variable will require of SME owners.
The domain of ESG issues is a broad and ultimately existential challenge and is often reduced in the general media for ease of communication to the key term of “sustainability”. The topic of sustainability is now an increasingly common boardroom topic in all entities as well as at the government level, with the impact of this now omnipresent issue clearly capable of impacting P&L results. This article will focus on sustainability issues given the recent attention to climate control. Future articles will tackle social and governance issues from an SME’s viewpoint.
Defining the goal
One leading stakeholder which gives foundational context to the sustainability and ESG agenda is the United Nations Sustainable Development Goals (UN SDG, 2015). For greenhouse gas emissions (GHG), climate scientists and environmental conservationists have of course for decades championed the need for tempering GHG and carbon pollution levels.
Milestone pronouncements which have given a platform for greater awareness and now the call-to-action include the Kyoto Protocol of 1997, the Paris Agreement of 2015 and the UN SDGs. Industry-aligned councils have also been notable stakeholders, including the World Business Council for Sustainable Development (WBCSD, 1995), the World Resources Institute (WRI) and their GHG Protocol guidance (GHGP, since 2001) which are a leading light on classifying, measuring and disclosing GHG emissions. These various supranational alliances are largely managed under the United National Framework Convention on Climate Change (UNFCCC, 1994).
The focus on compliance with GHG emission targets to meet 2030 targets and beyond, and in turn the creation of a broader momentum to have all societal stakeholders align to these UN-set goals is picking up rapid traction. Whilst the balance of how developed industrialised countries should lead the initiatives to meet or exceed the targets is debated with emerging countries, the role of corporations, large and small presents an interesting opening for Singapore-based SMEs to become leaders in the domain.
The ESG road ahead for Singapore businesses
The complex and evolving GHGP targets and measurement disclosures are aimed at larger corporations and businesses, with a focus on the energy industry and agriculture where a material source of GHG emissions is attributed. These GHGP accounting standards provide a framework to support the transition of prior business-as-usual practices to evolving new practices and energy sources that help to drive industry, government, and wider society.
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In Singapore, the National Environment Agency (NEA) is the statutory body that oversees GHGP matters, charged with ensuring the NEA Act, 2002 and subsequent legislation, including the Energy Conservation Act 2012, the Carbon Pricing Act 2018 and other Acts that reduce emissions intensity. The amount of GHGs emitted per dollar of GDP nationally is targeted to reduce by 36 per cent from 2005 levels by 2030.
In effect, such a target ultimately requires a marked reduction in emissions for all Singapore-based firms, and not just the larger listed companies, which is the focus of reportable GHG-emitting assets. So, whilst large corporates and even state-owned enterprises that own an industrial facility that emits more than 2000 tCO2 need to report annually on emission statistics, the future contributory expectations of the wider Singapore business community cannot be ignored given the interlocking nature of industry value chains.
The imposition of a carbon tax at the current rate of SG$5.00 (US$4) per tonne of GHG emissions applies to industrial facilities that need to register as taxable facilities when the GHG emissions are at or above 25,000 tonnes of CO2 annually (tCO2e). The slated increase to SG$25.00 (US$18)/tCO2e in the near term as soon as 2024, and a targeted SG$45.00 (US$33)/tCO2e by 2026 and SG$80.00 by 2030 foreshadows broader implications.
Scoping to be proactive
This necessarily granular level of tracking, reporting and taxing is a part of the wider Singapore Green Plan 2030. Whilst this reporting and taxing requirement are focused on larger corporations, the role of SMEs is not to be forgotten. When we realise that there are more than 70,000 SMEs in Singapore which in aggregate contribute more than 50 per cent of economic output and the majority of employment, SMEs are indeed a key driver of economic activity that needs to be in step with GHG Protocols.
The UNs SME Climate Hub alliance highlights the role of SMEs further by noting in their definition of SMEs such levels of contribution rise to 90 per cent of business volume worldwide. These contribution levels indicate that SMEs in Singapore can and perhaps should take a leadership role.
The GHGP standards framework defines three classifications of emissions. These are:
- Scope 1: direct emissions from a corporate’s activities.
- Scope 2: emissions traceable to purchased energy choices and;
- Scope 3: emissions due to a wider value chain view of all related activities, encompassing upstream emissions implicit with input purchases through to downstream associated costs of a taxable entities’ product/service output. The looming ultimate accounting capture of Scope 3 emissions reporting will see attributed emissions for all corporate entities more fully attributed and thus accountable to being subject to future carbon pricing policy.
Value chain realities
The difficult and ongoing debate on how to recognise, account for and levy costs on Scope 3 emissions is an ongoing and complex issue. However, SMEs in Singapore have the ability to be proactive and be well-prepared for the inevitable inclusion of Scope 3 emissions as a business cost factor. As SMEs often have larger corporations as their ultimate customer, reflecting in part the broad and global nature of value chains, the incentive to be proactive in preparing for Scope 3 compliance is clear for stakeholders that value the merits of sustainable long-term planning.
Other reasons for a wider pre-emptive approach by SMEs on all 3 levels of emissions per the GHGP framework include:
Revenue reasons
- Customers of SMEs will increasingly prefer more compliant GHGP-rated companies. Those that acknowledge their efforts in addressing Scope 3 emissions will differentiate themselves positively.
- Products and services from SMEs that acknowledge the need to have a long-term strategy that addresses Scope 3 emissions will be more attractive to responsible consumers/customers.
- Where an SME’s products and/or services are purchased by other corporates, such purchasing decisions will increasingly include more stringent procurement criteria that will encompass Scope 3 reduction efforts and measures.
Cost and innovation management reasons
- A long-term strategy which encompasses all levels of tracked emissions will result in lower COGS, boosting margins and unit economics.
- Efforts to reduce or control costs and efforts to find supply and conversion manufacturing solutions that result in GHGP-compliant input partners will encourage innovation efforts. Seeking to improve value chain delivery efficiency is fundamental to continuous improvement efforts.
- Detailed scrutiny of all supplier relationships should lead to closer relationships with value chain partners given the need to understand each other’s interdependencies as GHGP best practice becomes more detailed.
The culture shift needed by Singapore SMEs
The impact of a proactive adoption of a business sustainability approach can be seen as a basic culture shift given that the historic focus areas of many SMEs are on revenue and cash flow amid resource constraints. Being customer-centric and sustainability-centric is a shift that may require deep and long-term changes to practices for many SMEs.
Also Read: The key to tackling climate change: Electrify shipping
Businesses with value chains that are in industry sectors that are materially impacted by the far-reaching effects of more granular measuring, accounting, and reporting requirements pertaining to GHGs in the future will be most challenged.
Being able to account for the GHG compliance levels of input supplies and then the possibility of being more accountable for externalities stemming from post-sale environmental effects such as recycling or disposal costs which are increasingly captured under a broader UN SDG ambit are forthcoming challenges.
But with such challenges, lies the opportunity for such Singapore SMEs to take on a leadership position in business sustainability in their respective industries. The financial ability of SMEs to be proactive in their anticipation of Scope 3 requirements and wider SDG goals will of course be a constraint.
In Singapore, the comprehensive Singapore Greenplan should be understood in the context of a wider array of grants and subsidies that exist in the ecosystem, reflecting the government’s long-term approach to being a leading example in GHGP compliance globally.
Optimistically, in a recent Business Sentiments Survey, IndSights Research found that half of the participating Singapore companies were aware of how they can adopt sustainable and green practices into their business model. It also found that 41 per cent of the companies already had firm plans to adopt sustainable practices, or had the intention to do so in the next 12 months.
Singapore’s SME advantages
The reality of Singapore’s unique history, its modest size and its entrepot status must be seen as only a positive. Its 100 per cent urbanised status and modest 733 square kilometres is a reality which has seen it tackle resource challenges creatively throughout its history.
With strong support from government policy which is pro-innovation and increasingly even more sustainability-centric, SMEs in Singapore have perhaps unparalleled support from government-linked schemes that align with its Greenplan.
The cost shifting to a sustainability-centric business model is not going to be easy. As the fundamentals of the GHGP and the rising awareness around more long-termed holistic views of how the UN SDGs can act as a yardstick for broader societal responsibility, the ability of SMEs to respond to these standards will be questioned. With many SMEs focused on basic short-term survival, how do SME managers embrace these shifting foundation stones positively?
The Singapore Green Plan in unison with other numerous initiatives under the WSQ (Workforce Skills Qualification) and MySkillsFuture umbrellas are just some of the policy, training and funding areas to be familiar with. In the area of GHGP compliance, there is a multitude of courses, funding grants and subsidies available to bolster the efforts of SMEs to be proactive in being leaders in the GHGP adoption.
Five Ps of a proactive SME
In future editions of this section on sustainability and SMEs, we will explore some of the details of such help available to Singapore businesses. Meanwhile, the appendix to this article gives a summary of some of the key resources in this complex domain that will be a good foundation for ensuring the appropriate research is done as a prelude to updating (or preparing) your own Green Plan.
Underpinning these multiple complexities is the guidance given by the UN’s SME Climate Hub which suggests a 5-phase approach to breaking down these deep and long-termed strategic and operational challenges.
As a Singapore-based SME, your company should:
- Pledge alignment with the UN SDGs
- Plan in detail how to be proactive and comply
- Proceed and execute the operational plans for compliance
- Publish your key performance Indicators to be transparent about your progress towards planned targets and
- Persuade other value chain partners and customers on their shared symbiotic involvement in the journey towards net zero emissions
This article was co-written by David Wai Lun Ng (PhD, CA) and IndSights Research.
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