From the Paris Agreement to your corner business

The nation’s army of small to medium business owners are pivotal to the backbone of the economy.

"It also shows how change is not only the business of large corporates – but also Australia’s Small to Medium Enterprises which drive our economy.”

But when it comes to something as crucial as helping contribute to Australia’s climate change commitments, some owners can feel a sense of disconnect.

This is not to say they don’t care.

The 2024 International Chamber of Commerce report reveals a paradox: more small to medium enterprises (SMEs) acknowledge the importance of climate action, but the barriers to effective action are growing.

70 per cent of SMEs report experiencing direct effects on their business in the past year. These impacts include supply chain disruptions, damage to assets or property and loss of productivity.

Under the Paris Agreement, Australia has committed to reduce emissions by 43 per cent by 2030 based on 2005 levels, and to reach net zero by 2050. Such ambitions we expect can only be met by working across supply chains – many members of that supply chain include SMEs.

SMEs want to engage on climate change

So what is this disconnect business operators feel from the ability to help enact change?

Globally, 60 per cent of SMEs rate skills and knowledge gaps as top reasons preventing them from taking action to reduce the impacts of climate change on their operations.

Thankfully, there are tools to help businesses fill this knowledge gap.

ANZ is building capability to help customers understand climate and nature risks.

We’re developing insights and solutions to assist small to medium business owners understand and navigate the transition such as energy efficiency, which offers cost and sustainability benefits.

The big picture

Australia’s Climate Change Authority (CCA) is currently developing advice on interim 2035 emissions reduction targets for Australia’s next National Determined Contribution (NDC) which is central to the Paris Agreement.

The Paris Agreement is an international treaty adopted at the UN Climate Change Conference (Cop21) in Paris 2015 with its overarching goal being to hold the increase in the global average temperature to well below 2°C above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels.

The NDC requires each Party to the Paris Agreement to reduce national emissions and adapt to the impacts of climate change.  

A closer look at the work of the CCA and the role of the NDC outlines the real possibilities of what we can achieve as a nation.

It also shows how change is not only the business of large corporates – but also Australia’s SMEs which drive our economy. It emphasises that achieving Australia’s net zero goals will require collective action from all sectors of society and SMEs are a significant part of the economy.

Striking the balance

In developing its advice, the Climate Change Authority is undertaking analysis across four areas:

• international considerations
• community wellbeing
• sectoral pathways
• economic analysis

It's acknowledged different sectors will decarbonise at varied rates, and Australia needs to consider both the opportunities and costs of these pathways.

The CCA’s recent Sectoral Pathways Review, explores the technology and emissions pathways most likely to support Australia’s net zero transition.

These are across six economic sectors – agriculture and land; built environment; electricity and energy; industry and waste; transport; and resources.

The opportunity

We expect that mandatory climate-related financial disclosures will support companies – including SMEs - to manage their own climate risks and opportunities, providing greater visibility of the physical and transition risks of companies.

The ability of businesses to be transparent about their transition plans could also open doors to long-term access to capital.

The reporting standards require companies[1] to share information on their climate governance, strategy, risk management and metrics and targets.

Understand emissions

To set relevant metrics and targets, organisations need to understand their emissions profile and potential mitigation activities.

Companies will be required to report their direct and indirect emissions, which includes both upstream and downstream activities across the value chain.

This means all activities from the sourcing and supplying of raw materials to manufacturing or production as well as then refining, marketing and selling of products. These don’t stop at the point of sale as emissions relating to the use of the sold product are also included.

Several criteria apply to the three groupings of businesses that will need to disclose. Subject to a phase-in approach, reporting periods commence for the entities captured under Group one from January 2025.

As we move into Group Two, from July 2026 and then Group Three from July 2027, more and more businesses across Australia, including some SMEs, will need to meet the mandatory climate reporting requirements by issuing a sustainability report.

We expect it will take time for companies to build up their capabilities in this regard and for data availability to be a challenge for some sectors. We expect this to improve over time as more companies are required to disclose and to assist in the process, ASIC has a number of resources available.

Mandatory climate reporting contributes to net zero by ensuring that companies measure and disclose their carbon emissions, which is essential for managing and reducing these emissions. 

The five transition schemes

Policy makers in Australia are using a combination of market signals and regulations to achieve the country's net zero goals.

There are five market schemes that small to medium-sized businesses could benefit from, which small to medium-sized businesses could benefit from.

1. Australian Carbon Credit Units (ACCUs)

ACCUs are tradeable financial products that represent a reduction in greenhouse gas emissions that would have otherwise been released into the atmosphere. Alongside investing in energy-efficient practices, which can reduce operational costs and improve sustainability credentials, SMEs can purchase ACCUs to offset their residual emissions.

2. Safeguard Mechanism

The Safeguard Mechanism sets a baseline for emissions for Australia's largest industrial emitters. SMEs may find new opportunities to supply goods and services to large emitters as they make investments and changes to business practice to reduce emissions.

3. Capacity Investment Scheme

This scheme provides a national framework to encourage investment in renewable energy. SMEs can benefit from this scheme by investing in renewable energy projects or by adopting renewable energy solutions across their operations. This can lead to reduced energy costs, increased energy security, and improved sustainability credentials.

4. Renewable Energy Target

The Renewable Energy Target aims to increase the generation of renewable electricity and reduce greenhouse gas emissions in the electricity sector. The Small-scale Renewable Energy Scheme (SRES) incentivises households and businesses to install small-scale renewable energy systems such as rooftop solar panels, solar water heaters and small-scale wind or hydro systems

5. New Vehicle Efficiency Standards Scheme

The New Vehicle Efficiency Standards Scheme aims to drive lower emissions and more cost-effective vehicles into the Australian market. SMEs can benefit from reduced fuel costs and lower maintenance expenses by adopting more fuel-efficient or electric vehicles. Additionally, businesses that demonstrate a commitment to sustainability by using cleaner vehicles can enhance their brand reputation and attract environmentally conscious customers.

These market schemes and attached credentials can improve a business’s long-term sustainability, while reducing emissions and operating costs. The list of potential win-wins for SMEs, communities, and the environment by investing in sustainable business practices is endless.

And in a world that is grappling with climate change, alongside developments in mandatory disclosure and increased transparency, businesses arguably no longer have a choice in understanding their footprint and setting targets.

Across the economy there is a willingness to embrace the work to establish and achieve commitments.

When a problem does seem large and intractable the tendency can be to feel overwhelmed by the task ahead. But the steps many of our SME customers are already taking show a clear pathway for all of us.

Cindy Arthur is Head of ESG, Australia Commercial, ANZ.

[1] https://asic.gov.au/regulatory-resources/sustainability-reporting/

Source: SME Climate Hub 2023 Survey (N=344 SMEs across 40 countries, including Australia), Capterra SME survey (N= 255 Australian SMEs)