In Portugal there are about 1.4 million micro, small, and medium-sized enterprises (SMEs), accounting for 99.9% of the corporate fabric. The country's economy breathes through your nostrils. In the coming years, your competitiveness and longevity will depend on a new factor for which most of you are not yet prepared: corporate sustainability - a set of policies and actions that a company adopts, aiming at the respect for the environment, the sustainable development of society, and the improvement of internal governance mechanisms.

For those who often operate with the goal of surviving until the end of the month or the year, sustainability issues are seen as something expendable or expensive. But European regulation and new market forces will force you to become sustainable in a very short time. There are as many as eight sources of pressure:

Do you sell your products and services to other larger companies?

In January 2023 the Corporate Sustainability Reporting Directive (CSRD) came into force, which obliges the largest European companies (about 50,000) to report on their sustainability work. What does this have to do with SMEs? By force of law, these large companies have to map the sustainability work done by their value chains, which are mostly composed of SMEs. Companies like EDP, Jerónimo Martins or Galp, for example, each have tens of thousands of suppliers. All of them will have to measure and report on dozens of sustainability indicators such as carbon footprint or water consumption. Small companies that have not done so will no longer be able to continue selling their products to large buyers.

Do you sell your products and services to end customers?

Every month, a new study by a consulting firm or international organization reinforces that, after COVID-19, consumers have been opting for healthier and greener lifestyles and for sustainable products or services. If, until a few years ago, these products were seen as a luxury inaccessible to the Portuguese middle class, today they are increasingly demanded by consumers, fostering economies of scale that allow the reduction of the final price.

Do you sell your products and services to public entities?

National legislation, such as the Public Procurement Code or the Climate Framework Law, encourages the inclusion of climate neutrality principles in public procurement and specifications. Gradually, the State will no longer be a buyer of non-sustainable products or services.

Looking for bank credit?

The European Central Bank and the European Banking Authority have launched a set of regulations and instruments (such as the BTAR and GAR) that require European banks to measure the volume of lending in line with sustainability principles. It is in the financial interest of banks to lend green capital so that they themselves can access cheaper capital. So it will be the banks that will force their clients, including SMEs, to adopt sustainability practices.

Do you have shareholders and investors? It is increasingly common for investors to collect ESG (environmental, social and governance) data from their investee companies in order to have a more accurate understanding of the risk and opportunity profile of their portfolio assets. They will also do so in order to comply with current European legislation, such as the Sustainable Finance Disclosure Regulation (SFDR), which requires investors to report on the positive and negative impacts of their investments on society and the environment.

Are you an SME with access to European funds?

With the goal of achieving carbon neutrality by 2050, the European Commission has injected sustainability principles and practices into its financial relationship with member states. To access European financial support, Portuguese SMEs will have to demonstrate that they are aligned with the European Ecological Pact. For example, the application form for the SME Fund 2023, which aims to protect the intellectual property rights of European SMEs, explicitly states that companies "involved in the ecological transition" will have "reinforced support."

Do you do your accounting using international accounting standards (IFRS) issued by the International Accounting Standards Board (IASB)?

As a European company, your answer is bound to be yes. The same organization will launch a global sustainability reporting standard, aligned with international accounting standards, on January 1, 2024. Finance departments in large companies and accountants in SMEs will have to become sustainability specialists. This transition - from pure accountants to consultants - will represent the biggest change in this trade since the automation of accounting in the 1950s.

Do you sell products with labels?

In the coming years most labels - from clothing to food - will include climate and social indicators, such as carbon footprint or recycling rate. SMEs that have shied away from sustainability practices will feel publicly exposed. Dozens of global brands already offer labels with QR codes that track products from raw material to final consumption.

Many SMEs will conclude that their survival depends on their ability to become more sustainable. Aware of this, Turismo de Portugal has recently launched a program (Empresas Turismo 360°) with a tool (Forest) that allows companies, most of them SMEs, to identify and report on their work in sustainability. It is a tool for transformation. Sustainability is a challenge, but also an opportunity. Companies that transform themselves by becoming more sustainable have better productivity rates, competitiveness and profitability. Sustainability does not have to be guided by deontological, moralistic, legalistic or public relations principles. It has financial, commercial and economic viability. That is why it is taught and researched in business and finance schools.

This article is a republishing of a text shared on Expresso - see the original here.

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