From Green to Black and White

FROM GREEN TO BLACK AND WHITE: EMBEDDING SUSTAINABILITY IN
SMEs


Sustainability and SMEs
Policymakers’ commitment to responsible and sustainable business practices in
the UK and the rest of Europe is increasingly backed up by ambitious and
specific commitments on carbon emissions and the use of energy.1 However, it
is very difficult to imagine that such commitments can be monitored, let alone
met, unless smaller businesses can also deliver savings and report on progress.
The UK’s small and medium-sized enterprises (SMEs) employ 60% of the
private sector workforce;2 they are estimated to account for 45% of total energy
use, 43% of serious industrial pollution incidents and 60% of all commercial
waste; additionally 31% of their energy usage is believed to be due to waste.3

Regulators are rightly cautious about lumbering SMEs with disproportionate
regulatory requirements in the name of sustainability;4 however, as mandatory
reporting by larger businesses and the public sector relies on input from their
suppliers, sooner or later reporting requirements are likely to trickle down to
even the smallest of businesses.5 The challenge for all stakeholders is to
manage the administrative burden of such reporting throughout the supply
chain in order to avoid wasteful duplication, heavy-handed regulation, or
barriers to entry.

Accountants can make both the short- and the long-term case for
sustainability
Both government and business support professionals realise that efficiency
savings are the most common trigger for deliberate sustainable business
practices among small and micro enterprises.6 Because SMEs’ use of inputs,
especially energy, is rarely optimal, accountants can leverage their positions as
advisers on financial management to engage the sector by pointing out quick

1 The UK Government is committed to cutting carbon emissions by 34% compared to the 1990 baseline
by 2020. The European Commission aims for a 20% reduction compared to the 1990 baseline by 2020.
2 BIS (2010) Small and medium size enterprise statistics for the UK and the regions 2009 London,
October 2010
3 Vickers, I., Vaze, P., Corr, L., Kasparova, E., & Lyon, F. (2009) SMEs in a low carbon economy,
London, BIS
4 NERA Economic Consulting (2006) Policy options to Encourage Energy Efficiency in the SME and
Public Sectors. DEFRA, August 2006
5 Jenkins, H. (2009) ‘A business opportunity model of corporate social responsibility for small- and
medium-sized enterprises. Business Ethics: A European Review 18:1, pp. 21-36
6 Better Regulation Executive (2010) Green light? A review of regulatory barriers to small business’
resource and energy efficiency BIS, London.

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wins through increased efficiency.7 For this first contact with sustainable
business practices and reporting to be successful, returns will usually need to
be demonstrable within fairly short intervals – a maximum of 3 years – in order
to fit with the planning cycle of owner-managers, and truly reflect small
business’ cost of capital.8

While the potential for savings can help trigger an owner-manager’s interest, it
will not always be large enough to make the case for long-term investment or
innovation9 – in fact, savings may accrue entirely to the business’ more
powerful customers.10 The simplest types of efficiency savings may convey no
advantage at all if they are easy to replicate. Rather, the potential of sustainable
practices to overcome barriers to entry into large supply chains, including those
of government itself, to trigger innovation and to help further engage the
workforce11 will matter more to forward looking owner-managers. In order to
deliver such advantages, however, businesses need to not only achieve savings
but also demonstrate improvements year on year – with the help of well-
rounded finance professionals.12

FIVE STEPS TO SUSTAINABILITY REPORTING

1. Committing the business publicly to taking action
2. Assessing the business’ impact / footprint
3. Setting targets for reducing impact
4. Acting to reduce impact
5. Publishing the business’ policies and actions


7 Forbes Insights (2010) [Title to be confirmed] ACCA, CGA-Canada and CNDCEC. About 8% of the UK
SMEs surveyed used an accountant’s advice on improving their operations, and even fewer did so on
technology matters (3%), but nearly half (45%) did so on matters of financial management.
8 Arnold, G.C., and Hatzopoulos, P. D. (2000) “The theory-practice gap in capital budgeting: Evidence
from the United Kingdom”, Journal of Business Finance & Accounting, 27, pp.
603-626.
9 Tilley, F., Hooper, P. and Walley, L. (2003) ‘Sustainability and Competitiveness: Are there Mutual
Advantages for SMEs?’ in Jones, O. and Tilley, F. (eds) Competitive Advantage in SMEs: Organising for
Innovation and Change, John Wiley & Sons Ltd., Chichester, 71-84.
10 Simpson, M., Taylor, N. And Barker, K. (2004) ‘Environmental responsibility in SMEs: does it deliver
competitive advantage? Business Strategy and the Environment 13:2 pp. 156-171
11 Forstater, M., MacGillivray, A., Raynard, P. and UNIDO (2006), Responsible Trade and Market Access:
Opportunities or Obstacles for SMEs in Developing Countries?; Gallup (2009), Innobarometer 2009
Analytical Report Flash Eurobarometer Series #267, Brussels, European Commission; Bhattacharya, C.
B., Sen, S. and Korschun, D. (2008), ‘Using Corporate Social Responsibility to win the war for talent’ MIT
Sloan Management Review 49:2, pp. 37-44.
12 Plugge, L. and Wiemer, J. (2008), Small, Smart and Sustainable: Experiences of SME Reporting in
Global Supply Chains, GRI Research and Development Series, GRI, Amsterdam

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Reporting standards need to Think Small First and account for change
Policymakers and practitioners alike have long approached sustainability from
the point of view of the more proactive large corporates.13 However, standards
developed by or for these will not necessarily work for smaller businesses. SMEs
will rely particularly on common standards, clearly mapped to customer and
regulatory requirements, because as standards-takers they can incur substantial
costs in complying with multiple frameworks.14

The smallest of businesses require simple methodologies, making use of
financial data that they already produce for management purposes15 and
conversion factors developed by Government.16 Combined, these can inform
simple footprinting exercises, using input/output financial analysis to
demonstrate the business’ commitment to footprinting, inform tenders, and
direct the owner/manager towards priority areas for improvement.

However, this initial approach is not sufficient for the purposes of monitoring
and documenting improvements because it relies on static assumptions about
resource efficiency for the sake of simplicity.17 It is also insufficient for the
purposes of customers, whose main interest in sustainability reporting will, as
discussed, be to flag up potential savings in their supply chains and monitor
whether these are being achieved. Ideally, monitoring improvements would
require the use of physical consumption data that are costly to prepare,18 but
SMEs can use financial and (some) physical data in order to build ‘benchmark’
footprints, establish assumptions on the relationship between financial flows
and physical consumption and then forecast, monitor and report on these.19

The profession must step outside its comfort zone to nurture sustainability
reporting
Footprinting and sustainability reporting are still relatively new disciplines for
SMEs and their advisers. The priority now is to ensure a move towards common
standards, built from the bottom up. Eventually, as more emphasis is placed on

13 Plugge and Wiemer (2008)
14 Forstater et. Al (2006)
15 For recent evidence on the management information used by SMEs, see ACCA and CBI (2010) Small
Business Finance and the Recovery, ACCA, London, p. 23
16 See DEFRA and DECC (2009), Guidance on how to measure and report your greenhouse gas
emissions, DEFRA, London, p. 20
17 Kilpinen, M. S. and Clarkson, P. J. (2009) ‘Exploiting change Impact Analysis to support sustainability’
Paper presented to the 7th Annual Conference on Systems Engineering Research (CSER), Loughborough
University, April 2009.
18 See IFAC, ‘Improving information flows to support decisions’ IFAC Sustainability Framework
http://web.ifac.org/sustainability-framework/imp-improvement-of-information
19 A similar approach is discussed in great detail in Kilpinen and Clarkson (2009)

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aligning standards and ensuring comparability, footprinting and reporting
methodologies ought to be integrated into the accounting, IT and financial
reporting systems of SMEs and become interoperable with those of their larger
customers. While this process is already underway, it is not realistic for the
accounting profession, entrepreneurs or policymakers to expect immediate
results – these could take a decade or more to materialise. Even with widely
accepted standards in place, the comparability of reports between businesses,
especially businesses of different sizes or in different sectors, would not be
guaranteed, as indeed it is not in the case of financial statements.20
Professional judgment would still be of the utmost importance.

This could present the accounting profession with a challenge, since generally
neither business owners nor accountants are skilled in translating costs into
sustainability data. Larger businesses are responding to this challenge through
the use of external assurance services21 but this is unlikely to be an option for
the majority of small businesses. Alternatively, accountants may need to further
develop their professional networks in order to incorporate trusted sustainability
professionals to whom they can direct clients,22 while the largest practices may
try to identify and employ suitably qualified specialists as part of a well-defined
service offering.23

In sum:

• Regulators are rightly cautious about lumbering SMEs with
disproportionate regulatory requirements in the name of sustainability;
however, as mandatory reporting by larger businesses and the public
sector relies on input from their suppliers, sooner or later reporting
requirements will trickle down to many SMEs as well.

• The challenge for all stakeholders is to manage the administrative
burden of such reporting throughout the supply chain in order to avoid

20 Cole, V., Branson, J., and Breesch, D. (2009) ‘How to measure the comparability of financial
statements?’ International Journal of Managerial and Financial Accounting 1:4, pp. 379-397.
21 KPMG (2008) KPMG International Survey of Corporate Responsibility Reporting. KPMG, Amsterdam,
October 2008.
22 Jarvis, R. and Blackburn, R. (2009), ‘The role of small and medium practices in providing advice to
small and medium sized enterprises’ IFAC SMP Committee Information Paper, IFAC, New York April
2009.
23 This option is adapted from the ‘qualified’ model for the delivery of HR advice by accountancy practices,
as discussed in Jarvis, R. and Rigby, M. (2010), The Provision of HR/Employment Relations Advice to
SMEs: The Role of Small and Medium Accountancy Practices (SMPs). Paper presented to the CIPD
Centres’ Conference, Keele, Staffordshire, June 2010

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wasteful duplication, heavy-handed regulation, or barriers to entry for
SMEs.

• Policymakers and practitioners alike have long approached sustainability
from the point of view of large companies. However, standards
developed by or for these will not necessarily work for smaller
businesses.

• Footprinting and sustainability reporting are still relatively new
disciplines for SMEs and their advisers. The priority now is to ensure a
move towards common standards, built from the bottom up.

• Accountants must step outside their comfort zone to nurture
sustainability in SMEs and help their SME clients to integrate
sustainability reporting with accounting and financial reporting.

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