Singapore SMEs and sustainability: Taking a proactive stance
Environmental Services | 16 May 2023
Embracing the sustainability challenge
The challenges (and opportunities) of being a Singapore based SME is familiar to the readership of IndSights articles. In the current macro and geo-political environment, the goal of remaining competitive is complicated by rising interest rates, broad cost escalation, supply chain unpredictability and the rapid change flowing through many industries from digital transformation. Overlaying all these potential hurdles is the spectre of inevitable Environmental, Social and Governance (“ESG”) compliance requirements and what this looming management variable will require of SME owners.
The domain of ESG issues is a broad and ultimately an existential challenge and is often reduced in the general media for ease of communication to the key term of “sustainability”. The topic of sustainability is now an increasingly common boardroom topic in all entities as well as at the government level, with the impact of this now omnipresent issue clearly capable of impacting P&L results. This article will focus on the sustainability issues given the recent attention to climate control. Future articles will tackle social and governance issues from an SME’s viewpoint.
READ MORE: about findings on business sustainability
Defining the goal
One leading stakeholder which gives foundational context to the sustainability and ESG agenda is the United Nations Sustainable Development Goals (“UN SDG”, 2015). For greenhouse gas emissions (“GHG”), climate scientists and environmental conversationists have of course for decades championed the need for tempering GHG and carbon pollution levels. Milestone pronouncements which have given a platform for greater awareness and now the call-to-action include the Kyoto Protocol of 1997, the Paris Agreement of 2015 and the UN SDGs. Industry aligned councils have also been notable stakeholders, including the World Business Council for Sustainable Development (“WBCSD”, 1995), the World Resources Institute (WRI) and their GHG Protocol guidance (“GHGP”, since 2001) which are a leading light on classifying, measuring and disclosing GHG emissions. These various supranational alliances are largely managed under the United National Framework Convention on Climate Change. (“UNFCCC”, 1994)
The focus on compliance with GHG emission targets to meet 2030 targets and beyond, and in turn the creation of a broader momentum to have all societal stakeholders align to these UN set goals is picking up rapid traction. Whilst the balance of how developed industrialised countries should lead the initiatives to meet or exceed the targets is debated with emerging countries, the role of corporations, large and small presents an interesting opening for Singapore based SMEs to become leaders in the domain.
The ESG road ahead for Singapore businesses
The complex and evolving GHGP targets and measurement disclosures are aimed at larger corporations and businesses, with a focus on the energy industry and agriculture where a material source of GHG emissions is attributed. These GHGP accounting standards provide a framework to support the transition of prior business-as-usual practices to evolving new practices and energy sources that help to drive industry, government, and wider society.
In Singapore, the National Environment Agency (“NEA”) is the statutory body that oversees GHGP matters, charged with ensuring the NEA Act, 2002 and subsequent legislation, including the Energy Conservation Act 2012, the Carbon Pricing Act 2018 and other Acts reduce emissions intensity. The amount of GHGs emitted per dollar of GDP nationally is targeted to reduce by 36 percent from 2005 levels by 2030. In effect such a target ultimately requires a marked reduction in emissions for all Singapore based firms, and not just the larger listed companies, which is the focus of reportable GHG emitting assets. So, whilst large corporates and even state-owned enterprises that own an industrial facility that emits more than 2000 tCO2 need to report annually on emission statistics, the future contributory expectations of the wider Singapore business community cannot be ignored given the interlocking nature of industry value chains.
The imposition of a carbon tax at the current rate of S$5.00 per tonne of GHG emissions applies to industrial facilities that need to register as a taxable facility when the GHG emissions are at or above 25,000 tonnes of CO2 annually (“tCO2e”). The slated increase to S$25.00/tCO2e in the near term of as soon as 2024, and a targeted S$45.00/tCO2e by 2026 and S$80.00 by 2030 foreshadows broader implications.
Scoping to be proactive
This necessarily granular level of tracking, reporting and taxing is a part of the wider Singapore Green Plan 2030. Whilst this reporting and taxing requirement is focused on larger corporations, the role of SMEs is not to be forgotten. When we realise that there are more than 70,000 SMEs in Singapore which in aggregate contribute more than 50 percent of economic output and the majority of employment, SMEs are indeed a key driver of economic activity that needs to be in-step with GHG Protocols. The UNs SME Climate Hub alliance highlights the role of SMEs further by noting in their definition of SMEs such levels of contribution rise to 90 percent of business volume worldwide. These contribution levels indicate that SMEs in Singapore can and perhaps should take a leadership role.
The GHGP standards framework defines 3 classifications of emissions. These are:
- Scope 1: direct emissions from a corporate’s activities.
- Scope 2: emissions traceable to purchased energy choices and;
- Scope 3: emissions due to a wider value chain view of all related activities, encompassing upstream emissions implicit with input purchases through to downstream associated costs of a taxable entities’ product/service output. The looming ultimate accounting capture of Scope 3 emissions reporting will see attributed emissions for all corporate entities more fully attributed and thus accountable to being subject to future carbon pricing policy.
Value chain realities
The difficultly and ongoing debate in how to recognise, account for and levy costs on Scope 3 emissions is an ongoing and complex issue. However, SMEs in Singapore have an ability to be proactive and be well prepared for the inevitable inclusion of Scope 3 emissions as a business cost factor. As SMEs often have larger corporations as their ultimate customer, reflecting in part the broad and global nature of value chains, the incentive to be proactive in preparing for Scope 3 compliance is clear for stakeholders that value the merits of sustainable long-term planning.
Other reasons for a wider pre-emptive approach by SMEs on all 3 levels of emissions per the GHGP framework include:
- Customers of SMEs will increasingly prefer more compliant GHGP rated companies. Those that acknowledge their efforts on addressing Scope 3 emissions will differentiate themselves positively.
- Products and services from SMEs that acknowledge the need to have a long-term strategy that addresses Scope 3 emissions will be more attractive to responsible consumers/customers.
- Where an SME’s products and/or services are purchased by other corporates, such purchasing decisions will increasingly include more stringent procurement criteria that will encompass Scope 3 reduction efforts and measures.
Cost & innovation management reasons:
- A long-term strategy which encompasses all levels of tracked emissions will result in a lower COGS, boosting margins and unit economics.
- Efforts to reduce or control costs and efforts to find supply and conversion manufacturing solutions that result in GHGP compliant input partners will encourage innovation efforts. Seeking to improve value chain delivery efficiency is fundamental to continuous improvement efforts.
- A detailed scrutiny of all supplier relationships should lead to closer relationships with value chain partners given the need to understand each other’s interdependencies as GHGP best practice becomes more detailed.
The culture shift needed by Singapore SMEs
The impact of a proactive adoption of a business sustainability approach can be seen as a basic culture shift given that the historic focus areas of many SMEs are on revenue and cashflow amid resource constraints. Being customer-centric and sustainability-centric is a shift that may require deep and long-term changes to practices for many SMEs. Businesses with value chains that are in industry sectors that are materially impacted by the far-reaching effects of more granular measuring, accounting, and reporting requirements pertaining to GHGs in the future will be most challenged. Being able to account for the GHG compliance levels of input supplies and then the possibility of being more accountable for externalities stemming from post-sale environmental effects such as recycling or disposal cost which are increasingly captured under a broader UN SDG ambit are forthcoming challenges.
But with such challenges, lies the opportunity for such Singapore SMEs to take on a leadership position in business sustainability in their respective industries. The financial ability of SMEs to be proactive in their anticipation of Scope 3 requirements and wider SDG goals will of course be a constraint. In Singapore, the comprehensive Singapore Greenplan should be understood in the context of a wider array of grants and subsidies that exist in the ecosystem, reflecting the government’s long-term approach to being a leading example in GHGP compliance globally.
Optimistically, in a recent Business Sentiment Survey, IndSights Research found that half of the participating Singapore companies were aware of how they can adopt sustainable and green practices into their business model. It also found that 41 percent of the companies already had firm plans to adopt sustainable practices, or had the intention to do so in the next 12 months.
Singapore’s SME advantages
The reality of Singapore’s unique history, its modest size and entrepot status must be seen as only a positive. It’s 100 percent urbanised status and modest 733 square kilometres is a reality which has seen it tackle resource challenges creatively through its history. With strong support from government policy which is pro-innovation and increasingly even more sustainability-centric, SMEs in Singapore have perhaps unparalleled support from government linked schemes that align with its Greenplan.
The cost of shifting to a sustainability-centric business model is not going to be easy. As the fundamentals of the GHGP and the rising awareness around more long-termed holistic views of how the UN SDGs can act as a yardstick for broader societal responsibility, the ability of SMEs to respond to these standards will be questioned. With many SMEs focused on basic short-term survival, how do SME managers embrace these shifting foundation stones positively?
The Singapore Green Plan in unison with other numerous initiatives under the WSQ (Workforce Skills Qualification) and MySkillsFuture umbrellas are just some of the policy, training and funding areas to be familiar with. In the area of GHGP compliance, there are a multitude of courses, funding grants and subsidies available to bolster the efforts of SMEs to be proactive in being leaders in the GHGP adoption.
READ MORE: Singapore Business Resources
5Ps of a proactive SME
In future editions of this section on sustainability and SMEs, we will explore some of the details of such help available to Singapore businesses. Meanwhile the appendix to this article gives a summary of some of the key resources in this complex domain that will be a good foundation for ensuring the appropriate research is done as a prelude to updating (or preparing) your own Green Plan. Underpinning these multiple complexities is the guidance given by the UN’s SME Climate Hub which suggests a 5-phase approach to breaking down these deep and long-termed strategic and operational challenges.
As a Singapore based SME, your company should:
- PLEDGE alignment with the UN SDGs;
- PLAN in detail how to be proactive and comply;
- PROCEED and execute on the operational plans for compliance;
- PUBLISH your Key Performance Indicators to be transparent about your progress towards planned targets and;
- PERSUADE other value chain partners and customers on their shared symbiotic involvement in the journey towards net zero emissions.
Glossary of Terms
- 2030 Target: 1.5% reduction vs pre-industrialisation carbon emissions
- 2050 Net zero: Targets net zero GHG emissions (Singapore currently forecasts it is on track to achieve this)
- COP21 The Paris Agreement (2015 Conference of Parties of the 21 largest industrialised countries): Adoption of the 2030 1.5 degrees celcius and 2050 carbon neutral targets
- COP26 Glasgow: 2021 Conference of Parties of 120 world leaders, reaffirming the 1.5 deg c target and many other commitments in recognising accelerated action was required.
- GHGP: Green House Gas Protocol – how to account for GHGs.
- ISO14001: A framework for establishing an effective Environmental Management System for companies and organisations.
- Kyoto Protocol 1997 – operationalises the preceding UNFCCC and gains agreement from 37 industrialised countries to reduce carbon emissions.
- SG United Career Conversion Programme: https://www.wsg.gov.sg/
- Singapore Green Plan: Singapore’s plan to meet 2030 pledges. https://www.greenplan.gov.sg/targets
- SME Climate Hub: (in alliance with Exponential Roadmap, UNs Race to Zero, and the WeMeanBusiness collective) – the Pledge, Plan, Proceed, Publish, Persuade approach.
- The 1.5 deg c Business Playbook: A guidance through 4 pillars to highlight key solutions to achieve 2030 emission targets.
- The 1.5 deg c Supply Chain Leaders: Large corporate leaders committed to drive leadership in global supply chain to achieve net zero emissions by 2050
- The Exponential Roadmap Initiative: Innovators, transformers and disruptors focused on action to achieve 2030 emission targets.
- UNFCCC 2001: United Nations Framework Convention on Climate Change
- UN SDG, 2015: United Nations Sustainable Development Goals
READ MORE: IndSights has thought articles on specific industries. The following are some industry perspective articles which covers sustainable industry practices:
- Sustaining the future of the security industry: Moving forward with digitalisation
- Singapore’s air transport recovery journey
- Food manufacturing in Singapore
- How will Singapore’s food services industry survive and thrive in 2021?
This article was contributed by David, in collaboration with IndSights Research, first published on e27.
David Wai Lun Ng Ph.D., CA. combines a continuing career as a CFO consultant, academic and coach. His cross-domain approach catalyses improvement in performance for individuals and organisations at all levels. His recent work has focused on technology translation, stakeholder management and innovation with SMEs and start-ups. He has been based in Singapore since 1997 in regional and global roles across multiple industries and is an adjunct lecturer at Curtin Singapore and Newcastle Australia Institute of Higher Education in Singapore.