Empowering SME Sustainability Reporting

Sydney Rice, University of Melbourne Faculty of Business and Economics, 2024 World Bank + IMF Annual Meetings Fellow

Executive Summary

As sustainability reporting becomes table stakes for maintaining partnerships with larger enterprises, small and medium-sized enterprises (SMEs) that lack the capability to report or track their environmental impact risk losing their ability to compete against better-resourced, larger companies (Memia Fendri et al., 2024). For SMEs integrated into large corporations' value chains, particularly in carbon-intensive sectors such as agriculture, transportation, and waste management, the stakes are especially high. Many SMEs lack the resources to track or reduce their environmental impact, which compromises their ability to remain competitive in corporate value chains.

This policy paper recommends amending the Income Tax (Transitional Provisions) Act 1997 to expand the Small Business Energy Incentive, allowing SMEs to claim a 20% bonus tax deduction on sustainability reporting expenses such as software and emissions tracking tools. This targeted, low-cost solution leverages existing infrastructure, addresses financial barriers, and promotes voluntary participation without requiring upfront grants. By reducing the cost burden via a tax deduction, this measure directly improves SMEs’ ability to measure and report their environmental impact, helping them remain competitive in low-carbon supply chains.

Problem Identification

SMEs are defined as firms with fewer than 200 employees or under $100 million annual turnover. They  play a crucial role in the Australian economy, contributing to nearly 50% of private sector employment and over 30% of Gross Domestic Product (GDP) and are estimated to contribute around 60% of industrial carbon emissions (SME Climate Hub, 2022;Nalinee, 2024). Their participation in sustainability reporting is therefore critical to meeting Australia’s legislated commitment to net zero emissions by 2050.  However,  they are falling behind in adopting practices that would reduce carbon emissions and improve sustainability (ref). Between 2021 and 2023, the proportion of SMEs taking major carbon-reducing actions fell from 27% to 19%, evidencing the growing challenge in SMEs meeting climate goals (UK Finance, 2024).

77% of SMEs cite high upfront costs and complex reporting standards as key barriers in implementing sustainability reporting practices (SME Climate Hub, 2022). Close to two-thirds of small business owners are worried they don’t have the right skills and knowledge to tackle the climate crisis (SME Climate Hub, 2022). These challenges often prevent SMEs from tracking their environmental impact effectively, which not only hinders their ability to reduce carbon emissions but also leaves them vulnerable to increasing regulatory and market pressures for transparency. The systemic issue of underreporting has significant long-term implications: without robust sustainability practices, SMEs risk losing competitiveness in a market that increasingly values environmental accountability. Thus, the inability of SMEs to participate in sustainability reporting can have long-term economic and environmental repercussions. 

Context

Background

Sustainability reporting is crucial for SMEs to measure and reduce their environmental impact, enhance efficiency, and remain competitive in an increasingly eco-conscious market. As SMEs account for a significant share of emissions, their participation is vital to achieving national and global climate targets (Department of Climate Change, Energy, the Environment and Water, 2024). 

Sustainability reporting refers to the systematic disclosure of an organisation’s environmental, social, and governance (ESG) performance. Reports typically record data such as greenhouse gas emissions, energy and water use, and waste generation. These reports are generally published publicly or submitted to recognised reporting platforms such as the Global Reporting Initiative (GRI) where they are accessible to regulators, investors, and the general public.

Following the GRI (or other standardised and internationally recognised sustainability reporting frameworks) can be challenging for SMEs for several reasons, among them resource limitations, limited expertise, and complexity. 48% of SMEs also cited funding issues, and 40% cite time as additional barriers (SME Climate Hub, 2022). Whilst many see sustainability reporting as unfeasible in the short-term, 21% of SMEs that are not currently engaged in sustainability reporting expressed they would be "ready and willing" to do so with the right frameworks and support in place (ICC - International Chamber of Commerce, 2023).

Scope 3 emissions refer to indirect emissions that occur across a company’s value chain, such as those from suppliers, product use, or transportation. Larger corporations increasingly require their suppliers to meet Scope 3 emissions targets, and SMEs unable to comply risk losing business partnerships (Manav, 2024). These SMEs often operate in business-to-business (B2B) sectors where their position as suppliers to larger enterprises makes them critical to achieving Scope 3 emissions reductions. For example, a supermarket chain might find that most of its emissions are from the production and transport of goods supplied by smaller manufacturers. As a result, these large firms expect their suppliers to measure and reduce their emissions to meet overall corporate sustainability goals. 

This dynamic disproportionately impacts SMEs, which are some of the most adversely affected due to the complexity and cost of sustainability reporting. Without automated systems or in-house sustainability expertise, this can take several weeks and require hiring consultants or purchasing specialised tools. Without the means to meet these demands, SMEs may face exclusion from corporate value chains, limiting their market access and threatening their long-term viability (Memia Fendri et al., 2024).

Current Policy Landscape

Recent legislative developments, such as the amendment to the Corporations Act  2001 (Cth) that was introduced through the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, introduced mandatory climate-related disclosure laws for large businesses and financial institutions (Allens, 2024). This requires large entities to disclose climate risks and opportunities under international frameworks like the Task Force on Climate-Related Financial Disclosures. However, SMEs are explicitly excluded from these requirements, creating a significant policy gap (Allens, 2024). Through this legislative change, sustainability reporting has been positioned as a mandate as opposed to an opportunity. This is due to harsh punishments for large corporations that do not abide, coupled with support for smaller businesses to not engage in reporting, as it is deemed too costly for SMEs. This fails to harness demonstrated demand amongst SMEs to engage in sustainability reporting. 

Furthermore, SMEs that act as suppliers to larger corporations may be indirectly required to report under the National Greenhouse and Energy Reporting (NGER) Scheme. This mandates large corporations and facilities exceeding specified emissions or energy thresholds to report annually on their greenhouse gas emissions, energy production, and energy consumption to the Clean Energy Regulator. SMEs themselves are rarely direct reporters under NGER, but many must provide accurate emissions or activity data to larger clients who are obligated to comply. This creates a significant compliance burden for SMEs, who often lack the technical expertise, staff capacity, or digital infrastructure to produce high-quality reporting data. This places them at risk of losing contracts or damaging business relationships.

Domestic Policy Case Studies

One government program relevant to SMEs was the 2024 Energy Efficiency Grants for Small and Medium Sized Enterprises, administered by DCCEEW. This focused on supporting SMEs to manage energy usage and costs by funding upgrades such as replacing inefficient appliances, improving heating systems, and conducting energy audits (Energy Efficiency Grants for Small and Medium Sized Enterprises - DCCEEW, 2023). Businesses could apply for grants valued between $10,000 and $25,000, and up to $56.7 million was available over 2 grant rounds (Energy Efficiency Grants for Small and Medium Sized Enterprises - DCCEEW, 2023). While this program indirectly supported sustainability reporting by enabling energy audits, its focus was limited to energy efficiency.

A second relevant policy is the Small Business Energy Incentive. This is an amendment to the Income Tax (Transitional Provisions) Act 1997 (Cth) that provides an additional 20% deduction for businesses with an annual turnover of less than $50 million on "spending that supports electrification and more efficient use of energy" (Small Business Energy Incentive, n.d.). This includes expenditures such as upgrading energy systems to reduce energy consumption. Up to $100,000 of total expenditure is eligible for the energy incentive, with the maximum bonus tax deduction being $20,000 per business (Small Business Energy Incentive, n.d.). 

Another government program relevant to SMEs is the Net Zero Planning Grant, with the first round of applications opening in 2025, administered by the NSW Government as part of its Business Decarbonisation Program. This initiative supports businesses, including SMEs, to plan and prepare for net zero by funding activities such as developing greenhouse gas inventories (NSW Government, 2025). Businesses can apply for grants of up to $30,000, covering up to 75% of eligible project costs (NSW Government, 2025). While this program does not mandate reporting, it directly assists SMEs to build the systems and data foundations necessary for sustainability disclosure.

Despite these efforts, several gaps in the existing policy framework hinder the effective integration of sustainability reporting for SMEs. Programs like the Energy Efficiency Grants address only one component of sustainability - energy usage - failing to address sustainability reporting. For example, there is limited national guidance on aligning SME reporting with international frameworks such as the Global Reporting Initiative (GRI), which leads to inconsistency and confusion. The cost barriers remain significant, as the costs of sustainability reporting may still be prohibitively expensive for many SMEs. In order to effectively tackle the issue of engaging SMEs in sustainability reporting, policy needs to address the cost and information barriers at a national level.

Policy Options

Option 1:  Australian Small Business and Family Enterprise Ombudsman to implement a comprehensive ESG reporting support program

ASBFEO should lead the development of a comprehensive ESG Reporting Support Program. ASBFEO is well positioned to coordinate this initiative due to its mandate to represent SME interests and its existing capacity to deliver national programs. This program could include an integrated digital platform with sector-specific guidelines, training resources, and practical frameworks aligned with International Sustainability Standards Board (ISSB) standards. Aligning with ISSB standards ensures that SME disclosures are credible and compatible with the expectations of larger corporate partners, investors, and international markets. This would reduce the knowledge gap and build long-term capacity in the SME sector; however, it is resource-intensive to develop and maintain. Benchmarking against the Commonwealth’s SME digital advisory program (ASBAS Digital Solutions Round 3, $25.136 million over five years) suggests a national ESG reporting support platform with training and guidance could be scoped at roughly $12–15 million over four years.

Option 2: Federal Government to establish a sustainability reporting grant program for SMEs

The Federal Government could create a grant program covering up to 50% of eligible sustainability reporting costs (e.g., software, tools, and third-party auditing), capped at $20,000 per SME, with administration handled by DCCEEW and  delivery support from DISR. This could encourage SMEs to adopt sustainable practices by reducing upfront costs. Potential concerns are high administrative costs alongside the complex process involved in managing grant applications. Using the Energy Efficiency Grants for SMEs as a benchmark ($56.7 million across two rounds, with grants of $10,000–$25,000), a sustainability reporting grant program could be budgeted at $60 million for two rounds. 

Option 3: Amend the Corporations Act to mandate large firms’ support for SME sustainability reporting

Amend the Corporations Act 1001 (Cth) to require large firms with Scope 3 emissions targets to provide technical, educational, or financial assistance to their SME suppliers. One practical form of support could be subsidised access to emissions tracking and reporting software, allowing SMEs to align with their clients’ reporting frameworks without bearing the full technology cost. This would support consistent data collection and improve supply chain transparency while fostering long-term supplier relationships. This could encourage a trickle-down effect, leveraging larger firms’ resources to support SMEs. However, it would cause additional regulatory burdens on large firms, which may resist compliance, as well as needing complex guidance and monitoring mechanisms. Large firms would bear the direct financial outlay, estimated at $100–200 million annually if 5,000 SMEs received an average assistance of $20,000. Oversight would be handled with ASIC. 

Option 4: Extend the Small Business Energy Incentive to include sustainability reporting and emissions tracking expenses

Broaden the applicability of the Small Business Energy Incentive by offering a 20% bonus tax deduction for expenditures related to sustainability reporting and emissions tracking. This amendment would extend the current 20% bonus deduction to include expenditures related to sustainability reporting and emissions tracking under the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024.  Such expenditures would encompass costs for reporting software, third-party auditing, and tools to track emissions data, akin to existing provisions for energy efficiency improvements. This can be done via amending the Income Tax (Transitional Provisions) Act 1997 (Cth) to introduce sustainability reporting costs as further deductible expenses, similar to energy efficiency costs currently. This would equip SMEs with the necessary data and insights to understand their environmental impact and meet reporting standards. This option would thus reduce the financial burden on SMEs engaging in sustainability reporting, as well as enabling access to knowledge, information, and support without requiring upfront government funding. Based on Treasury’s costing of the Small Business Energy Incentive at $310 million for four years, broadening the scheme to include sustainability reporting is likely to add $50–75 million annually in foregone tax revenue. Administration would be through the Australian Taxation Office.

Policy recommendation

Option 4, the extension of the Small Business Energy Incentive to include sustainability reporting and emissions tracking expenses, is recommended as the most effective way to “critical measure of success addressing the policy problem”. The Australian Treasury should lead implementation as all tax-related policies fall within their remit, leveraging the existing framework for the Small Business Energy Incentive. The eligibility criteria should identify SMEs with an aggregated annual turnover of less than $50 million.

The cap on total deductions should be less than the limits established for energy efficiency due to the lower cost of sustainability reporting and emissions tracking. For example, a maximum bonus deduction expenditure of $50,000, applying to the costs of eligible assets and services, with a maximum bonus deduction of $10,000. To be eligible for the bonus deduction, the expenditure must be eligible for a deduction under another provision of the tax law such as business expenses for software subscriptions, consultancy fees, or professional services that relate to reporting and compliance. The expanded measure should apply to eligible expenses incurred from the commencement date of that year. This is an extension of the Small Business Energy Incentive's current timeline by one additional fiscal year. 

The estimated cost of this policy is a decrease in receipts of $155 million over five years, based on the projected financial impact of the Small Business Energy Incentive (Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023). In practice, this means the government collects less tax (receipts) because SMEs are claiming the extra deduction.  This figure is drawn from Treasury’s costing of the existing Small Business Energy Incentive (approximately $310 million over four years) and scaled down to reflect the narrower scope of sustainability reporting expenditure. This estimate accounts for the expanded scope and projected increased participation by SMEs. The measure should have minimal regulatory impact. As a result, the measure would reduce upfront financial barriers for SMEs while minimising administrative overhead.

Risks

Economic and Fiscal Risks for SMEs

While the proposed amendment to the Income Tax (Transitional Provisions) Act 1997 to broaden the Small Business Energy Incentive aims to reduce financial barriers for SMEs, there is a risk that businesses with limited cash flows may not have the capacity to invest in sustainability reporting, even with the incentive in place. Research shows that up to 43% of Australian SMEs report cash-flow issues as their biggest barrier to investment in new technology or compliance measures (CPA Australia, 2023). This would negatively impact the efficacy of the policy.

This risk could be mitigated by allowing SMEs to claim the deduction as an immediate offset, or by complementing the policy with targeted advisory services or low-interest financing to help businesses manage upfront costs.

Political Risks

The proposed reduction in government receipts ($155 million over five years) could face criticism in the current fiscal environment, where there is increasing pressure to prioritise budget surpluses (Lum, 2024). There is also a risk that the legislative amendment may face opposition in Parliament due to the expenditure involved, or be deprioritised against competing fiscal measures. 

In order to mitigate this, the Treasury could frame the measure as both a productivity and competitiveness policy, highlighting supply chain benefits and alignment with net zero goals to secure broader political support. Positioning the measure as critical to Australia’s trade competitiveness and net zero commitments would strengthen its political case.

References

Action needed to support SMEs in the Net Zero transition. (2021). UK Finance. https://www.ukfinance.org.uk/news-and-insight/press-release/action-needed-support-smes-in-net-zero-transition

Department of Climate Change, Energy, the Environment and Water. (2023, December 3). Energy efficiency grants for small and medium sized enterprises. https://www.dcceew.gov.au/energy/programs/energy-efficiency-grants-small-medium-sized-enterprises

International Chamber of Commerce. (2023). Path for growth: Making sustainability reporting work for SMEs. https://iccwbo.org/news-publications/policies-reports/path-for-growth-making-sustainability-reporting-work-for-smes/

Intergovernmental Panel on Climate Change. (2023). Chapter 8: Poverty, livelihoods and sustainable development. https://www.ipcc.ch/report/ar6/wg2/chapter/chapter-8/

Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023, Cth, Australia. (2022). https://parlinfo.aph.gov.au

Lum, A. Y. R. (2024, May 16). Australian federal budget 2024. KPMG. https://kpmg.com/au/en/home/insights/2024/05/federal-budget-australia.html?pageAccordionID=executive-summary&nocache=true

Manav. (2024, March 19). Scope 3 emission reduction: How to deal with SMEs in the value chain? Future Bridge NetZero Events. https://netzero-events.com/scope-3-emission-reduction-how-to-deal-with-sme-in-the-value-chain/

Allens. (2024, September). Mandatory climate-related financial reporting is here. https://www.allens.com.au/insights-news/insights/2024/09/mandatory-climate-related-financial-reporting-legislation/

Fendri, M., Lefevre, A., Zhong, X., & World Economic Forum. (2024, September 23). SMEs should link growth with environmental sustainability. World Economic Forum. https://www.weforum.org/stories/2024/09/net-zero-environmental-sustainability-smes-benefits/

Nalinee. (2024, February 16). Statistics on small and medium enterprises (SMEs): A 2024 overview. InvoiceInterchange AU. https://www.invoiceinterchange.com.au/statistics-on-small-and-medium-enterprises-smes-a-2024-overview/

Australian Taxation Office. (n.d.). Small business energy incentive. https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/small-business-energy-incentive

SME Climate Hub. (2022, February 23). New data reveals two-thirds of surveyed small businesses concerned over navigating climate action. https://smeclimatehub.org/new-survey-reveals-small-business-barriers-climate-action/

UK Finance. (2024). Unlocking the SME Net Zero transition. https://www.ukfinance.org.uk/policy-and-guidance/reports-and-publications/unlocking-sme-net-zero-transition

The views and opinions expressed by Global Voices Fellows do not necessarily reflect those of the organisation or its staff.