SMEs' place in the journey to sustainability
EVERY year, the accounting community in the country tends to latch on to one or two trendy business topics. You'll notice it by how frequent a subject is being offered as a webinar session by several accounting organizations over a given period. A "hot" talking point as of late is sustainability in business. And with the rising effects of anthropogenic climate change affecting most Philippine businesses on a yearly basis, it's really about time that it is one.
Sustainability, in the corporate sense, refers to doing business without negatively impacting the environment and society while still earning enough revenue to remain financially viable for the long term. Many governments around the world have made sustainability in business a priority for them to achieve their own climate change commitments. This usually involves requiring companies — usually large publicly traded ones — to disclose their environmental, social and governance (ESG) data in an effort to make these companies adopt sustainability goals and practices into their core business models.
In 2019, the Securities Exchange Commission released Memorandum Circular 4, Series of 2019 that details its own sustainability reporting guidelines for publicly listed companies (PLCs). It mandates PLCs to submit a sustainability report in accordance with globally accepted standards alongside their annual report. But while this is generally a step in the right direction, there is a strong case why small and medium enterprises (SMEs) should be at the forefront of sustainability efforts.
For one thing, SMEs are a juggernaut in commerce. According to the Philippine Statistics Authority, SMEs make up 99.6 percent of the 1.080 million operating establishments in 2021, supporting the livelihood of over 5 million people or 62.7 percent of the country's total employment and driving up to 40 percent of the country's gross domestic product. With 81.5 percent of these SMEs located outside the National Capital Region, these enterprises also have the indispensable role of uplifting the lives of rural Philippines by fostering trade, creating jobs and strengthening local economies. Yet despite their obvious huge impact in society, we often overlook how these less-visible entities approach these crucial ESG issues.
Many probably do not care a lot about sustainability reporting, and it's easy to understand why. Unlike bigger organizations, most SMEs lack the time, knowledge and resources to grapple with such extensive problems like climate change or social prejudice. And unlike PLCs, these businesses may be run by owner-managers who aren't compelled to adopt sustainable practices by a board, shareholders or the public. Simply presenting a long ESG checklist and obligating them to comply would just be seen as another reportorial burden that they already don't have enough time nor funds for. So how can one convince the SMEs to adopt sustainable goals and show some accountability in pursuing them?
The most popular way is to present sustainability as an opportunity for efficiency-savings rather than a compliance matter. Practices such as energy conservation, waste recycling, using energy-efficient equipment, solar power and water-saving mechanisms help keep costs down and have proven to be more cost-effective than the usual energy use. SME accountants can use their role as financial advisers to encourage SMEs to adopt these practices by pointing out the quick gains a business can achieve over the years through efficiency.
Popularity of a green reputation
Aside from savings, SMEs can also benefit from the popularity of a green reputation. More and more consumers are becoming eco-conscious. A 2022 research report from Carousell Media Group and Interactive Advertising Bureau Southeast Asia and India shows that 75 percent of Filipino consumers prefer sustainable and eco-friendly brands. A company with sustainability practices already incorporated in their operations will have access to these new markets supporting green businesses.
Tax laws and regulations are also used by the government to promote sustainability initiatives and projects. For example, Revenue Regulation 5-2019, which implements the tax incentives provisions of the Philippine Green Jobs Act of 2016, grants incentives to qualified enterprises a special deduction of 50 percent of the total expenses for skills training and research development expenses of qualified business entities, and tax duty-free importation of capital equipment that's to be used in creating green jobs.
But since SMEs are mostly run by owner-managers, their personal motivation for taking eco-friendly or socially responsible initiatives is what will matter more than any economically strategic or marketing-friendly incentives. SMEs with owners who are aware and actually care about ESG issues on a more personal level will be adopting sustainability practices more than those enterprises who are only in it for the financial savings.
Owner-managers may realize then that adopting sustainability practices will be less of a choice in the future. A very real existential threat faces SMEs if climate goals won't be reached. Back in 2019, the Philippines was determined as the country most at risk from the climate crisis, according to a report published by the Institute for Economics and Peace. Extreme weather, rising sea levels and death of sea life are just some of the environmental problems plaguing the country. Unfortunately, SMEs with their limited resources, and the fact that many are located in high-risk areas tend to bear the brunt of these natural and ecological disasters. Research has shown that at least 25 percent of SMEs do not reopen following a major natural disaster.
Facing insurmountable challenges like the climate problem can be daunting, especially for SMEs. So it's imperative for us accountants that any conversations around sustainability must always include the plight of this sector. Accountants are in the unique position to actually influence SMEs. After all, there's no better person to communicate these urgent matters than someone these small businesses already trust. As we approach Earth Day in a couple of days, we should remind ourselves that the journey to sustainability is a process we should be undergoing ourselves now and must not just remain a trendy talking point we occasionally discuss in webinars.
Eba May Desabelle-Tibubos, is a partner of Desabelle Desabelle and Associates, an institutional member of the Association of CPAs in Public Practice (Acpapp) Negros Occidental. The opinion of the writer does not reflect in any way the opinion of these institutions.