Small, Smart, and Compliant: How IFRS Proportionality Lowers the ESG Barrier for SMEs

The IFRS Sustainability Disclosure Standards (IFRS S1 and S2) embed proportionality, enabling SMEs to produce decision-useful ESG disclosures without incurring undue cost or complexity. Two mechanisms drive this: (1) reliance on reasonable and supportable information available at the reporting date, and (2) methods commensurate with resources, such as qualitative scenario analysis and narrative disclosure of anticipated financial effects.
This approach addresses global policy priorities (OECD, G20) and aligns with Hong Kong’s move toward IFRS adoption, ensuring interoperability with frameworks like the EU’s VSME. For SMEs, proportionality means faster compliance, improved access to capital, supply-chain resilience, and operational efficiency. It’s not a free pass—it’s a scalable pathway to full compliance and competitive advantage.
Simon Mak

Think ESG reporting is only for big corporations? Think again. The IFRS Sustainability Disclosure Standards—IFRS S1 (General Requirements) and IFRS S2 (Climate)—bake in proportionality so smaller businesses can publish decision‑useful sustainability information without hiring a platoon of consultants or standing up enterprise systems on day one. That design choice isn’t a footnote; it’s the feature that makes a global baseline usable for the businesses that power most economies. IFRS Foundation factsheet, Jan 2025 | PwC Viewpoint summary of ISSB webcasts, Feb 2025

Why proportionality matters now

SMEs are being asked for ESG data by banks, insurers, and large customers who’ve made climate and sustainability commitments of their own. Without a practical pathway, smaller firms risk losing contracts and paying more for capital—not because they’re unwilling, but because reporting has felt out of reach. International policy work recognizes this: the G20/OECD has called out the need for sustainability reporting that works for SMEs and emerging markets, and European authorities introduced a simplified Voluntary SME Standard (VSME) to ease value‑chain frictions. The message is consistent: keep proportionality and scalability front and center. OECD for G20 SFWG (2024) policy note | World Bank/Accountancy Europe deck on SME proportional approach (Mar 2025)

Against this backdrop, the ISSB’s proportionality mechanisms are not an afterthought; they are central to making S1/S2 feasible for all companies, including SMEs in developing markets. IFRS Proportionality Factsheet | KPMG overview of proportionality/scalability

The two levers SMEs can pull today

1) Use “reasonable and supportable information… without undue cost or effort.”
When information is hard or costly to obtain, you are expected to use relevant and appropriate data that’s already available at the reporting date—and explicitly not to conduct exhaustive searches. Examples include using utility bills for energy, fuel invoices for fleet emissions, HR records for workforce metrics, and supplier attestations or spend-based estimates for selected Scope 3 categories. The standard asks for a balanced judgment between effort and investor benefit. IFRS Proportionality Factsheet | ISSB webcast explainer

2) Apply methods “commensurate with skills, capabilities and resources.”
Your methods can match your maturity. That could mean a qualitative climate scenario analysis in year one (instead of complex modeling), and qualitative disclosure of anticipated financial effects when quantification would require skills or systems you don’t yet have. The standards anticipate that your capacity—and your disclosures—scale up over time. IFRS Proportionality Factsheet | PwC Viewpoint summary

Key takeaway: proportionality doesn’t lower the bar; it builds a ramp.

Where proportionality shows up in practice

The IFRS Foundation has summarized where these mechanisms apply. For SMEs, four areas are especially helpful:

Debunking three SME myths

Myth 1: “We must quantify everything on day one.”
Not so. IFRS S2 allows qualitative scenario analysis and qualitative anticipated financial effects when quantification would require undue cost or specialized skills you don’t yet have—so long as the narrative is decision‑useful and you commit to improving. IFRS Proportionality Factsheet | PwC Viewpoint

Myth 2: “Scope 3 is impossible for SMEs.”
You’re expected to start with reasonable, supportable methods—supplier questionnaires, spend‑based estimates, and narrower focus on the most material categories—then enhance over time. IFRS Proportionality Factsheet | KPMG guide

Myth 3: “These are big‑company frameworks.”
S1/S2 are globally applicable and intentionally scalable. IFRS S1 even instructs companies to consider SASB Standards to identify industry‑specific topics—an efficient way for SMEs to focus on what’s financially material in their sector. IFRS SASB Standards page | KPMG on SASB in IFRS S1

A 90‑day SME playbook (practical and proportionate)

Days 1–15: Define scope and material topics
Sketch your business model and value chain; shortlist sustainability‑related risks/opportunities that could affect cash flows, access to finance, or resilience. Use SASB sector guidance as a starting compass. IFRS SASB Standards page | KPMG—SASB in S1

Days 16–45: Collect “reasonable and supportable” data
Pull utility bills (Scope 2), fuel invoices (Scope 1), procurement spend + supplier declarations (priority Scope 3), and HR records (workforce). Document estimates and why they’re reasonable. IFRS Proportionality Factsheet | ISSB webcast

Days 46–60: Run a qualitative climate scenario analysis
Pick two plausible scenarios (e.g., orderly transition vs. delayed transition). Map exposure channels—input costs, policy changes, customer demand—and explain your response (supplier diversification, route optimization, equipment upgrades). IFRS Proportionality Factsheet | PwC Viewpoint

Days 61–75: Draft to the four pillars

  • Governance: Who is accountable? What decisions are escalated?
  • Strategy: How do material issues influence your business model and resilience?
  • Risk management: Identification, assessment, and response processes.
  • Metrics/targets: Begin with S2 cross‑industry metrics (Scope 1, 2, and material Scope 3; energy; risks) and set one or two near‑term, achievable targets. IFRS Proportionality Factsheet—S2 metrics | HKICPA guidance

Days 76–90: Get feedback and publish
Share a concise draft with your bank and two key customers. Ask: “Is this decision‑useful? What would make it more so next year?” Incorporate feedback, then publish—explicitly noting where you applied proportionality and how you’ll scale. KPMG—transition and first‑year reliefs | PwC Viewpoint—climate‑first application support

A lightweight case example (composite SME)

A regional food distributor with 140 employees needs to keep a major supermarket client. Using proportionality, it:

  • Scopes topics via SASB (Food Retail/Distribution): energy management, fleet emissions, food waste, worker safety.
  • Compiles energy and fuel data from bills and invoices; uses spend‑based estimates for upstream transport (a material Scope 3 category).
  • Runs a qualitative scenario comparing orderly vs. delayed transition, highlighting potential fuel cost volatility and refrigeration retrofits, and commits to driver training and route optimization.

The result: decision‑useful insight now, with a commitment to add intensity KPIs and refine Scope 3 next year—the iterative, capacity‑building pathway the standards envision. IFRS Proportionality Factsheet | KPMG transition pathway

Strategic payoffs for SMEs

  1. Access to finance on better terms. Banks and investors are integrating climate and ESG factors into pricing and diligence; proportionate S1/S2 reporting signals preparedness and improves comparability. OECD/G20 policy note | World Bank/Accountancy Europe
  2. Supply‑chain resilience. Preferred supplier lists now routinely require ESG data. Proportionate disclosures help you remain eligible and win tie‑breakers. World Bank/Accountancy Europe | PwC Viewpoint
  3. Operational efficiency. Baselines often surface quick wins: consolidating deliveries, optimizing refrigeration set‑points, or reducing waste. These lift margins and emissions performance. IFRS S2 cross‑industry metrics summary | HKICPA guidance

How this fits with policy and other standards

The ISSB’s proportionality approach aligns closely with policy moves to avoid SME overload while improving informational comparability. Europe’s VSME offers a modular, simplified structure designed primarily for business‑partner information needs and intended to be interoperable with the global baseline. Meanwhile, the OECD is working toward a core set of indicators that satisfy banks and supply chains without imposing full large‑company reporting burdens. Translation: reporting proportionately to IFRS S1/S2 is increasingly recognized across borders. World Bank/Accountancy Europe VSME summary | OECD SME reporting convergence

Final thought (and a nudge)

Proportionality is a ramp, not an exemption. The ISSB expects you to use what’s reasonable today, make transparent judgments, and ratchet up sophistication over time. That’s exactly what investors and customers want: comparable information that improves each year. Start with one material topic, one core metric, and one improvement you’ll deliver in 12 months. Publish the plan. Then iterate.

Ready to move? Drop “Proportionality” in the comments if you want a one‑page checklist and template to publish your first proportionate IFRS S1/S2 disclosure this quarter.

References

Note: This article provides general information and does not replace reading and applying the IFRS Sustainability Disclosure Standards themselves.

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Simon Mak
Simon Mak didn’t set out to build just another finance firm—he set out to change how business measures success. After graduating from McGill University and earning credentials as a CFA and CMA, Simon founded Ascent Partners in Hong Kong, blending financial rigor with a vision for sustainability. Along the way, he realized that true value isn’t just in numbers—it’s in impact. That belief inspired the Ascent Partners Foundation, which Simon leads as Chairman. The foundation supports causes from poverty relief to environmental protection, partnering with NGOs and sustainability networks to drive real change. His influence extends beyond the boardroom through roles with Friends of the Earth, the UN ESCAP Sustainable Business Network, and industry alliances—always guided by one principle: business should be a force for good.
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| September 12th, 2025 | Posted in View Point |

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