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Sustainability

Sustainability
(?)

Unlocking the ‘S’ in ESG

The ‘social’ facet of ESG is gaining more prominence with the evolution of gender pay gap rules, consumer trends and employee priorities, writes Doone O’Doherty The ‘social’ elements of environmental, social and governance (ESG) are rising in prominence, having played a secondary role to the environmental and governance pillars for some time. This lack of focus is partly because environmental and governance issues are much more clearly defined, and regulations in these areas are better developed – but things are changing. Local gender pay gap reporting regulations and the EU Pay Transparency Directive are game-changers. These, coupled with changing consumer preferences and employee attitudes, are prompting companies to increase their focus on social issues. The ‘S’ and tax contributions The social pillar of ESG looks at an organisation’s contribution to societal fairness. Total tax contributions are key in this regard, as tax is a key indicator of an organisation’s contribution to society. While the media often focuses on the level of corporation tax earned by the State, it is important to remember that companies are responsible for collecting income taxes via the PAYE system. In 2022, PAYE income tax and the universal social charge (USC) amounted to €25.46 billion. This equates to 30 percent of total Exchequer receipts. In addition, by paying employers’ PRSI (11.05%), employers are a significant contributor to the Social Insurance Fund, which funds social welfare benefits and the State pension. These are important components of an employer’s role in contributing to society via the tax system. This can increase trust in the market and promote an organisation’s overall purpose and values. The ‘S’ and pay equity When it comes to ESG and pay, the focus tends to be on linking executive pay to ESG goals. However, through an employment lens, an ESG strategy isn’t complete unless it addresses issues relating to all employees and supports the growth of a truly diverse workforce that is treated fairly, paid equitably and without bias. Equal pay In Ireland, equal pay provisions are contained in the Employment Equality Acts 1998 to 2021. Under this legislation, an employer is prohibited from paying an employee less (either directly or indirectly) in the same employment doing ‘like work’ on nine different grounds of discrimination. Although an organisation may be fully committed to equal pay, businesses must review their pay systems and consider carrying out an equal pay review to highlight issues they may not be aware of. If there are equal pay gaps, organisations must explain why. If no reasonable explanation can be found, steps must be taken to close the gaps. Gender pay gap Even if employers comply with equal pay obligations, they may still have a gender pay gap. Our analysis of 500 of the country’s largest employers that published gender pay gap reports in December 2022 found a mean gender pay gap of 12.6 percent. Firms must file new reports in December 2023 based on their situation in June. Progress in closing the gap will require a concerted effort that is enabled by HR, but led by business leaders, to improve the representation of women in their businesses. Pay transparency While many organisations already monitor pay equity, the EU Pay Transparency Directive – which must be transposed into national law by 2026 – introduces additional pay transparency measures. Key features of the Directive include: Recruitment: an obligation on employers to provide information concerning pay levels as part of the recruitment process and a prohibition to prevent organisations from asking candidates about their current or historic pay. Pay philosophy: a requirement for employers with more than 50 workers to share information on the criteria used to determine pay levels and progression. Pay information: a right for workers to request information on the average pay level split by sex for workers doing the same work or work of equal value. The ‘S’ and worker classification Spurred by COVID-19, on-demand labour platforms have grown. These offer new job opportunities for workers and convenient, more affordable services for consumers. The gig economy has become a hot topic in many societal and political debates. The debate primarily focuses on the workers’ working conditions and social security status. In Ireland, there are many ways to work and operate a business. Specific legislative protections for workers apply to each type of employment. For employers, it is important to ensure workers are correctly classified in a way that matches the reality of the relationship between the worker and the business. The misclassification of an individual can impact tax, social security and employment law rights and obligations. It can also lead to reputational damage if a company is perceived as treating workers inequitably. Acting as responsible corporate citizens With more focus on the social element of ESG, employers must make the following a priority for their organisation: Understand what legislation requires and the financial and reputational implications of getting it wrong. Ensure that their strategy, processes and systems around the changing regulations that underpin fair pay and workers’ rights are robust and accurate. Validate their organisation’s ability to produce the necessary statistical data to ensure compliance with the legislation. And if they cannot, identify the gaps. Employers should also begin crafting the narrative to explain how they support social progress – treating employees fairly, driving equality and acting as responsible corporate citizens. Doone O’Doherty is Tax Partner of People & Organisation at PwC

Sep 15, 2023
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Laying the groundwork for the ISSB sustainability standards

Following the release of two new standards by the International Sustainability Standards Board, Linda McWeeney outlines what companies can do now to prepare for their application The International Sustainability Standards Board (ISSB) has released two sustainability standards. It will be for jurisdictional authorities to decide whether to mandate use of the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, consistent with the approach taken for IFRS Accounting Standards issued by the IASB. These will be effective for annual reporting periods on or after 1 January 2024. The main aim of the new ISSB sustainability standards (S1 and S2) is that, initially, companies will provide reasonable and supportive information with regard to sustainability. The ISSB has provided reliefs and guidance. Year one requirements Even though there will be a requirement to provide sustainability reporting information along with the financial statements, companies can hold off on this reporting in year one and align it with their half yearly reporting where necessary.  There will also be no requirement for comparative information in year one. Companies using different methods can continue to use these methods for measuring scopes for the first year and will continue to align methods with the Greenhouse Gas (GHG) Protocol.    S1 and S2 will not be entirely new to many companies as they have been developed and built on the Task Force on Climate-related Financial Disclosures (TCFD) framework and Sustainability Accounting Standards Board (SASB) standards.   Investors and regulators demand and need high-quality, comparable information about risks and opportunities in relation to climate change in particular.   TCFD disclosure recommendations The TCFD sets out disclosure recommendations based upon core elements around which companies operate. These are: Governance Strategy Risk management Metrics and targets The disclosure recommendations are structured around these four elements. This information should help investors understand how the relevant reporting organisations think about and assess climate-related risks and opportunities: Governance Companies need to describe the board’s oversight of climate-related risks and opportunities.   Processes need to be in place to identify climate-related issues and boards need to be kept informed regularly on these issues. Climate needs to be part of the company’s strategy, policies, plans, budgets, goals and targets. Strategy Companies need to be able to describe the climate-related risks and opportunities and their impact on the organisation’s businesses, strategy, and financial planning. Risk management Processes need to be in place for identifying and assessing climate-related risks. How significant climate-related risks are in relation to other risks should be discussed and analysed. Boards should consider regulatory requirements related to climate change and how to mitigate and control material risks. Metrics and targets Metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process should be disclosed.  GHG emissions should be calculated in line with the GHG Protocol methodology to allow for aggregation and comparability across organisations and jurisdictions.  Reporting on emissions Companies are required to report on emissions. Direct emissions are generated from sources owned and controlled by the reporting company – e.g., transport fuels, heating fuels and fugitive gases or emissions of GHG associated with particular manufacturing processes. These emissions are classified as scope 1.   Indirect emissions are also generated as a consequence of the activities of the reporting company—but occur at sources owned or controlled by another company. These include scope 2 and scope 3 emissions.  Scope 2 includes the emissions associated with the purchase of electricity, heat, steam and cooling. Companies can identify these energy uses on the basis of utility bills or metered energy consumption at facilities within the inventory boundary.  The ISSB has agreed that a company disclosing scope 2 emissions would use the locations-based approach, which emphasises the connection between consumer demand for electricity and the emissions resulting from local electricity production.  Within a particular geographic boundary and over a specified time period, electricity output is aggregated and averaged.   Scope 3 emissions include entire value chain emissions. The majority of total corporate emissions fall under this scope from the goods it purchases to the disposal of the products it sells. While Scope 1 and 2 emissions are within the control of the company as they are operational, scope 3 emissions raise business development and strategy questions pertaining to products and services.   Companies using different methods can continue to use these methods for measuring scopes for the first year and will continue to align methods with the GHG Protocol.      Companies can also continue to be guided by the Global Reporting Initiative (GRI) and European Sustainability Reporting Standards (ESRS) to help assess and take responsibility for their impacts and contribute to a more sustainable future using a multi-stakeholder and investor-focused approach. Next steps The standards will be effective for annual reporting periods on or after 1 January 2024 and individual jurisdictions will decide whether and when to adopt the IFRS Sustainability Disclosure Standards. The ISSB has stated that it is working closely with jurisdictional standard setters to maximise interoperability between its standards and incoming mandatory reporting frameworks including the European Commission with their European Sustainability Reporting Standards (ESRS), and the US Securities and Exchange Commission. Linda McWeeney is Non-Executive Director and Senior Lecturer in Accounting and Finance at Technological University Dublin

Aug 28, 2023
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Will ESG survive the backlash?

Despite mounting scepticism, financial trends suggest that ESG is here to stay even if it is under a new name. Dan Byrne explains why You’d be forgiven for doubting the staying power of the environmental, social and governance (ESG) movement given the current wave of negativity. After all, the stories of pushback are mounting.  Granted, most are coming from the US. Republicans and fiscal conservatives are openly hostile to the term. They are led by people such as Texas Governor Greg Abbott and Florida Governor/presidential contender Ron DeSantis, who dismiss the concept as “woke capitalism”, restricting business and harming profits.  But the old saying still has weight: “If America sneezes, the world catches a cold.” It’s enough negativity to make investors more wary of ESG, and boards wonder whether they need to bother with it. Is this backlash a legitimate threat to ESG? Not from where we’re standing. Follow the money The main reason ESG will survive the backlash is that the money simply isn’t following the rhetoric. ESG critics can be as loud as they want, but they’re not making the corporate world think differently.  Two-thirds of respondents to a 2023 Bloomberg survey expect firms to continue incorporating ESG metrics into their business.  Meanwhile, financial services firm Morningstar Inc. has released new data showing that the success of anti-ESG funds has fallen dramatically from its peak in the third quarter of 2022. This peak was minor compared with the total value of ESG assets.  In other words, ESG priorities remain fixed, and the money working against them is dwindling.  The only thing likely to suffer from this wave of negativity is the actual term: ‘ESG’. Rechristening ESG The true measure of the longevity of ‘ESG’ is that many in the pro-ESG camp are willing to part ways with the term. Larry Fink, head of BlackRock Inc, has said he no longer uses it because of how politicised it has become. Even McDonald’s has done away with it. Meanwhile, the same two-thirds of respondents to the Bloomberg survey said that while firms would keep pursuing ESG, they would stop using the acronym.  But none of these groups are abandoning the principles underpinning ESG.  You might call it the one potential victory of the anti-ESG brigade: a rechristening – purely because firms are worried about reputational risk. Before the current backlash, it was estimated that the value of ESG assets would reach US$50 trillion by 2025. At the start of this year, they were estimated at $41 trillion and growing.  If, in five years, we’re calling ESG something different, it probably won’t dent the underlying principles that investors, consumers and many politicians care so vocally about. So, while the ESG backlash may be loud, we’re not seeing any evidence that its principles are losing ground.  Hence, directors and other corporate leaders hearing the noise from the US and thinking the concept is almost irrelevant should think again.  ESG remains ESG, even if its name changes. Dan Byrne is a journalist with the Corporate Governance Institute

Aug 25, 2023
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Four pathways to sustainable Irish cities

Ireland’s urban growth demands sustainable development. As we transition to a green future, our focus must be on modernising regulations, energy resilience, R&D and public-private partnerships, says Robert Costello Ireland’s urbanisation has been rapid: in 1969, half of the population lived in rural areas, and urbanisation is expected to reach 75 percent by 2050. In recent decades, urbanisation combined with general population growth and an economic boom has dramatically increased the footprint of Ireland’s cities. Much of this growth occurred without due regard for sustainable development. As Ireland sets out on a green transition, we must focus on making our cities sustainable. Like the broader economy, Ireland’s cities run largely on fossil fuels. According to the United Nations, cities consume about 78 percent of the world’s energy, accounting for more than 60 percent of greenhouse gas emissions. Transport accounts for almost 18 percent of total emissions in Ireland, and nearly all (94 percent) of these emissions come from road transport. Ireland has among the longest commute times in Europe, with many commuting into and around cities. Ireland’s buildings are among the hardest to heat in Europe, with heat loss rates (U-values) three times those of Sweden. With poor heat retention and a relatively high reliance on solid fuels and oil, Irish buildings have the highest emissions in Europe. Net zero emissions commitments of Ireland and the EU The European Union is committed to achieving a 55 percent reduction in greenhouse gas emissions by 2030 and net zero emissions by 2050. Ireland has committed to reducing emissions by 50 percent by 2030 and achieving net zero emissions by 2050. Considering Ireland’s starting point relative to many of our European counterparts, significant action is required across the economy and society. By implementing initiatives across the following four pathways, Ireland’s urban areas can become more sustainable and resilient to climate change. 1. Modernise regulations Having the funding and finance to complete the green transition is necessary, but it is not sufficient: the regulatory environment must enable the required investment. Ireland’s regulatory regime has been slow to respond to the needs of those working towards Ireland’s net zero ambition. Green hydrogen (hydrogen produced from renewable energy) will have a key role to play in decarbonising the country’s hard-to-electrify sectors. This must be underpinned by a national hydrogen strategy that reviews existing regulations, considers where changes are required, and signals to the market the direction of travel in terms of the development of this vital sector. While the Government has consulted on a hydrogen strategy, the consultation report has yet to be published. An ambitious hydrogen strategy will go hand in hand with plans to develop offshore wind farms on Ireland’s west coast, allowing the country to become an energy exporter. 2. Plan for energy resilience and sustainability According to Engineers Ireland, Ireland faces an energy trilemma in which we must meet our energy needs while ensuring that we (i) increase sustainable energy production, (ii) keep our energy supply secure, and (iii) maintain affordability. Diversity of supply and investment in infrastructure, such as interconnectors and energy storage, are essential in overcoming this trilemma. 3. Invest in research and development We cannot build the world of tomorrow without research and development (R&D) today. We must therefore recognise the role of R&D within Ireland in making our green transition possible. As an international hub for technology firms, Ireland has the potential to make digitalisation a core part of how we decarbonise our economy, building smart cities and communities. Combined public and private investment in digitalisation R&D will transform our economy. 4. Rethink public-private partnerships Public-private partnerships (PPPs) are a very useful method of contracting to deliver infrastructure. In Ireland, they have been successfully deployed to develop our motorway network, build schools and now deliver much-needed social housing. They involve a lot of upfront work, de-risking projects and ensuring that the assets built are robust and well-maintained into the future. They also encourage more private sector involvement in infrastructure, bringing new technology and innovation into projects. In addition, PPPs allow governments and public bodies to retain ownership of the infrastructure assets, an essential feature for long-term public ownership. Rethinking PPPs involves broadening the areas in which this model can be deployed to help realise our net zero ambition. Areas where the model (or a variation of the model) can be deployed include district heating, battery storage, offshore grid infrastructure, bus and train fleets, electric vehicle (EV) charging, sustainable buildings and port infrastructure. On the (path)way to a better future Cities, big and small, can set out on clean-energy pathways. Each pathway requires working with various stakeholders, including some with competing needs. These stakeholders include regulators, power generators, power transmission and distribution companies, industry and consumers. Only by laying the proper groundwork can people be brought on board and positive outcomes maximised. Stakeholder engagement is all the more essential in the case of Ireland’s cities, which have less administrative and financial autonomy than cities such as Paris or Berlin – Ireland has the lowest level of local autonomy in the European Union. With a population that continues to grow rapidly and become more urban, Ireland must seize the opportunity to build more sustainable cities. A successful and sustainable green transition requires bringing people on board and embracing the technology that will enable shorter, cleaner commutes, warmer homes and a cleaner environment. Outlining and committing to clean energy pathways enables the public and private sectors to put the resources in place and build the necessary capacity to deliver the required investment in our cities and towns. Robert Costello is Leader in Capital Projects & Infrastructure Practice at PwC

Jun 30, 2023
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Paving the way for a sustainable future

Our Chartered Star 2023 winner Peter Gillen tells us about his work helping companies to reach their sustainability goals and gives us his take on sustainable finance  Peter Gillen, a sustainability manager in Grant Thornton’s Financial Services Advisory Department, was recently named Chartered Star 2023, an annual designation recognising outstanding work in support of the UN Sustainable Development Goals (SDGs).   Run in partnership with One Young World and Chartered Accountants Worldwide, the aim of the annual Chartered Star competition is to celebrate the difference-makers in the profession who are helping to combat the climate crisis by bringing real, positive change to their workplaces and communities.  A graduate of Trinity College Dublin, Gillen grew up in Dundrum and began his career training with PwC before his passion for sustainability led him to join the Sustainability Team at Grant Thornton in 2021. As Chartered Star 2023, Gillen will attend One Young World Summit, representing Chartered Accountants Ireland and Chartered Accountants Worldwide, in Belfast in October. Here, he tells Accountancy Ireland about his interest in sustainability and gives us his take on ongoing developments in sustainable finance globally. Tell us about your decision to become a Chartered Accountant? What attracted you to the profession? When I was younger, particularly in the lead-up to the CAO application process in sixth year, family and friends told me accountancy was one of those qualifications that would allow me to work in any sector anywhere in the world. This has come to pass in my career so far as I’ve had the opportunity to work in Europe and the US as well as here in Ireland. Travel, in general, is one of the best ways I have found in my own life to learn from others. That’s why attending One Young World Summit later this year is so exciting to me. There will be so many people from many different countries, and we will have the opportunity to learn from both our shared experiences and different perspectives. What is it that initially sparked your interest in sustainability? I’ve always had an interest in sustainability and was frustrated by the slow pace of progress in the last decade or so. During the pandemic, when everyone had more time to reflect, I reconsidered the direction of my career and decided I would try to merge my training in financial services with my passion for sustainability. It was really about finding ways to use my knowledge to bring about real change and help companies on their sustainability journey. Chartered Accountants in general are uniquely placed to be right at the heart of sustainability discussions, and to deliver concrete plans to transition to a greener economy. There isn’t a medium- to large-sized organisation in the world that doesn’t employ a Chartered Accountant and we are uniquely placed to support ESG efforts, because of our problem-solving and analytical skill sets, our ability to take a step back and see the bigger picture, and lastly being able to apply our learnings from financial reporting to the impending sustainability reporting requirements, which will be applicable to companies over the next few years. What do you see as the greatest sustainability-related threats and challenges of our time? In terms of threats, it’s the classic, “the wants of the few outweigh the needs of the many”. Those in power – the few – often have self-interest in mind and their actions can have a disproportionate impact on others – the many. Those who have the power to influence real change are sometimes reluctant to do so. A classic example here is the large oil companies, or sometimes political leaders. Chartered Accountants working in leadership positions in large corporations really do have an important role to play in leading the way and convincing their stakeholders to tackle the climate crisis, not just for the planet but also for their companies’ long-term viability. For me, it comes down to collaboration, both nationally and internationally. Humankind is the single greatest determinant of the fate of our planet. We have the power to save our planet from becoming an uninhabitable place.  The challenge is trying to unite a large group to focus on one shared goal. History has shown us how difficult this can be, but also that it is possible and that it is often at times of catastrophic crisis that we unite. One example is the European Union, which was born in the aftermath of World War II. I’m confident that this time we can unite before it’s too late and introduce sufficient measures to address the issue. What is your take on current progress on Ireland’s Climate Action Plan? I think we have made a lot of progress, but we still have a long, long way to go. There are challenges but there is also immense opportunity for a country like Ireland. In particular, we have a unique opportunity to harness our coastline for the purposes of renewable energy – wind and wave, for example – and become a net exporter of energy instead of relying on imported fossil fuel-based energy sources. Reaching Ireland’s climate targets isn’t just about government action, though. Every single person has a role to play. For example, we have all become too reliant on convenience and this mindset needs to change. We need to learn to repair the goods we have where we can, instead of automatically replacing them – thinking differently about the lifespan of the items we own and the waste we generate. Tell us about Grant Thornton’s sustainability team and your role in it. I am a sustainability manager within our Financial Services Advisory Department. Our team helps our clients navigate all of the new environmental, social and governance (ESG) rules and regulations the EU and other regulatory bodies are bringing out. The world has really woken up to the climate crisis, so our work is evolving on a daily basis as legislators and regulators work to promote the transition to a greener economy. We help our clients to understand these requirements and the roadmap they need to put in place to meet them. My biggest career goal is to continue to help companies to support the UN SDGs, primarily by supporting SDG 13 Climate Action, because, for me, climate change is, without a doubt, the biggest challenge of our time. What do you think of the progress made by the European Commission thus far in progressing the Corporate Sustainability Reporting Directive? I’m optimistic about the progress they have made so far. The European Financial Reporting Advisory Group (EFRAG), the European body drafting these standards, delivered their first set of draft standards to the European Commission last November. In order to ensure companies can implement these new standards, Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, has asked EFRAG to prioritise efforts on capacity-building, basically providing the relevant companies with a support function to help them implement the standards. As a result, EFRAG is pausing the roll-out of sector-specific standards for now, which I can understand given the circumstances. It’s important that companies are given sufficient support so that they may implement the sector-agnostic standards appropriately before moving forward with the sector-specific standards. What does it mean to you to be named Chartered Star 2023? It was an honour to win it and something I wouldn’t have thought possible all those years ago when I started my career in accountancy. The list of past winners is so impressive. To be chosen this year is a privilege and I have a responsibility as Chartered Star 2023 to continue the high standard in everything I do. Ultimately, I hope to continue to work towards the achievement of the UN’s SDGs for many years to come both in my personal life and through my career.

Jun 02, 2023
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Strength in numbers - Sustainability and the SME

Sustainability is often seen as the domain of large corporates but SMEs have the collective potential to be more powerful players. Sheila Killian explains why Social and environmental sustainability is often seen as more relevant to big multinational companies (MNCs) than to SMEs, small-to medium enterprises employing no more than 250 people. MNCs are more likely to have a sustainability strategy, and resources for its implementation, monitoring, reporting and communication.  They are more likely to report externally, integrating their reporting across sustainability and financial activities, and to be scored by ESG rating agencies.  This does not mean that MNCs carry all the responsibility or should reap all the benefits, however.  SMEs are enormously impactful in aggregate and have a huge amount to gain by getting involved. So, why and how should they engage? The potential impact of SMEs on sustainability SMEs have a massive collective impact. In Ireland, they account for seven jobs in 10. While large companies are commonly exporters, SMEs tend to serve their local region.  In terms of where people live, work, shop and spend their leisure time, smaller enterprises dominate. This amplifies both their responsibility, and the opportunities open to them. Because SMEs are embedded in their communities, they often make a huge contribution socially without realising it. This may lie less in strategy than in values.  David O’Mahony of O’Mahony’s Booksellers Ltd, a long-established independent bookshop in the south-west, sums up the position: “It’s only when you really think about it and put all the things together that you realise that there’s a lot more going on … [in corporate responsibility and sustainability] … than we would have probably realised ourselves.”  O’Mahony’s enjoys high social capital locally, gained through understated good work for the community and environment, derived from values and a sense of neighbourliness rather than from formal reporting.  Why SMEs do not report Despite this implicit moral accountability, many SME owners do not think about reporting externally on their sustainability. This is often because they don’t see the value to be gained. Compared with MNCs, there is much less separation between ownership and management/control in SMEs.  Therefore, the need for both internal and external reporting is reduced because the main shareholders are already intimate with what is going on in the business, and employees are closer to the leadership.  Unless the business is considering raising external finance, there is little need to consider how potential investors might perceive it, and if there is a perception that customers are not interested in sustainability activities, these will not be reported.  It seems to come naturally to SMEs to be community-oriented, however, often because they are family-owned, and such behaviour reflects the origins and values of the family.  Such firms tend not to have formal, written codes of conduct, but instead propagate the personal values of their owners, who do not consider that a separate, published set of values and reporting on their social and environmental activities is necessary for business. Why SMEs should report One reason for SMEs to begin some form of sustainability reporting is so that they can compete with MNCs locally to attract and retain talented employees.  The labour market is tight, remote working has shifted the power balance, and younger generations are more focused on sustainability.  Increasingly, SMEs are framing their sustainability credentials more clearly, and connecting them with their employer brand so that they can attract the talent they need.  There is also a consumer angle. The challenge posed by behemoth online retailers to small, local bricks-and-mortar businesses is now well-rehearsed.  A small, independent business, like a bookshop, needs to clarify and articulate its values and personal touch as a competitive advantage.  This ‘personality’ needs to be communicated externally if it is to reach the right customers effectively. Sustainability reporting can convey a sense of what the company is all about, its values and purpose – its ‘soul’. A third reason, particularly applicable to SMEs operating in the business-to-business sphere, is that reporting on strong sustainability metrics confers an advantage in entering the supply chains of larger firms.  If, for instance, an MNC is moving towards zero-carbon, it is likely to require smaller companies in its supply chain to be also on that journey.  A fourth reason to report is the internal value to be gained from paying attention to sustainability. Measuring, reporting and constructing a narrative around social and environmental values will improve the culture of the business, and pave the way to greater innovation.  Hotel Doolin in County Clare is an example of a small business that tells its sustainability story effectively. It has shortened its supply chain by buying local produce.  The hotel harvests rainwater, it has eliminated single-use plastics, and uses environmentally low-impact energy and heating. It became Ireland’s first carbon-neutral hotel in 2019, under the Green Hospitality Programme, ahead of many larger competitors.  The business also promotes social sustainability, employing refugees, supporting local community groups and actively seeks to be a good employer. This has enhanced its reputation not only locally but nationwide.  Partnering with not-for-profits Smaller companies that are ambitious in terms of sustainability targets will inevitably want to achieve things that are beyond their capacity.  If, for example, a business decides to work on the water quality in the area in which it operates, it may lack in-house expertise, jeopardising its credibility with the local community. One solution may be a partnership with a not-for-profit organisation (NFP). NFPs often have the expertise to tackle social and environmental issues but lack the resources, whereas companies may have resources (money) but lack the knowledge. A partnership can achieve sustainability goals if the match is right.  The NFP needs to be operating in the area in which the company wants to make progress, and the company needs to align with the NFP’s approach to society and the environment.  Mutual respect and consultation are key. At worst, a partnership can be seen as a ‘fig leaf’ for the SME and can undermine the legitimacy of the NFP. At best, it can be truly impactful for all involved. SMEs’ supply chain responsibilities  MNCs are famously held responsible for the working conditions in which their goods are produced by companies in their supply chains. Scandals, including the sweatshop labour exposed in the 1990s to the Rana Plaza garment factory collapse in Bangladesh in 2013, have forced companies such as Nike, Gap and Nestlé to change their practices.  Bad practices persist today, however, even where goods are produced close to home. In 2020, for example, it was revealed that online vendor BooHoo was selling clothes made in extremely poor working conditions in Leicester in the UK.  For a small, independent retailer, this means that, unless it takes steps to assure itself of the origin of the goods it sells, the risk remains that all or some element/s of those goods may have been produced in sweatshop conditions.  Smaller firms may lack resources to monitor conditions in their suppliers’ factories. Nor are they likely to have the requisite buying power to impose a code of conduct on their suppliers. So, what can they do about the conditions under which the goods they sell are produced? The International Labour Organization has clarified that a firm has responsibility as far up the supply chain as it has ‘reasonable influence’.  Large firms can leverage direct buying power to positively impact supplier. Starbucks works with its coffee producers to bring them up to higher social and environmental sustainability standards, for example.  A small trader is, however, limited to choosing suppliers wisely, and using their influence when feasible, perhaps working with other firms in the sector. The key differences between the supply chain responsibility of MNCs and SMEs, then, relate to power and influence. This principle also applies to other areas of sustainability. More power means more responsibility and the potential to make a positive impact.  SMEs need to address all the key issues of fair pricing, employee welfare, human rights and environmental impact within their own operations and – as far as possible – outside of them, bearing in mind their levels of resources and power.  The key questions here are: “Are we doing all we reasonably can to achieve sustainable practice?” and “Are we seeking to improve?”  Sometimes, acting in concert with other SMEs, can achieve more. The outcome may not be perfection, but honest efforts in the right direction will carry collective weight.  Sustainability and the SME advantage While corporate sustainability is often seen as the domain of MNCs, SMEs – because of their numbers and connection with, and impact on, society – are potentially more important players.  Many SMEs do not report their sustainability policies for several reasons, including informality, time and resource pressures, unfamiliarity with reporting standards and frameworks, or because a strong internal locus of value and ethical behaviour is already vested in their owners and leaders.  However, SMEs generally have high levels of engagement with their local communities and implement sustainability on an intuitive basis, drawing on leaders’ personal values. Reporting these efforts can bring significant advantages externally and internally.  Despite a lack of resources relative to larger companies, the key to building sustainable value for SMEs lies in making the best choices that are within their power at a given time. Sheila Killian is Associate Professor at Kemmy Business School, University of Limerick, and author of Doing Good Business: How to Build Sustainable Value

Jun 02, 2023
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