By Jessica Camus, Chief Corporate Affairs Officer at Diginex
A growing awareness of sustainability and social awareness means Environmental, Social, and Corporate Governance (ESG) have become increasingly important to investors’ decision-making. No longer considered as only affecting niche impact investments or small stand-alone funds, concerns around climate change and diversity have seen ESG truly enter the mainstream.
In the US, ESG funds captured more than $50 billion of new money in 2020 – more than twice as much as in the previous year, while in Europe, ESG products accounted for 90 per cent of investment manager Candriam’s net sales – up from 60 per cent in 2019. A business’s ESG credentials clearly matter to investors. With strong ESG practices reflecting lower investment risk, and resulting in a marked improvement in a company’s operational performance, it’s little surprise that investors want to have companies like these in their portfolios.
Under scrutiny from investors, regulators and concerned consumers, businesses everywhere face rising pressure to showcase their ESG efforts. Many businesses, however, especially SMEs without the resources, can find it challenging to produce the data necessary to prove their reputation for sustainability and social awareness, and comply with the relevant industry regulations.
Vast and complex
ESG reporting can be a daunting task. Investors require a wealth of data to support a company’s claims and, given the potentially vast scope of ESG performance, it can be hard to even know where to start.
Indeed, such is the scope that businesses unfamiliar with ESG reporting will need to begin by deciding on exactly which factors they must report on. Rather than trying to capture every element of their ESG efforts in one report, businesses will make a more meaningful impact by focusing on a smaller number of issues and building upon them going forward. If their focus is on reducing carbon emissions, for example, it’s helpful to first understand just how much they’re producing. By reviewing the activity of their third-party providers and supply chains, in addition to their own day-to-day activities, they’ll be in a stronger position to recognise and prioritise where changes are needed.
In addition to reviewing what their own stakeholders are prioritising, it’s important that businesses also look at what their competitors and peers are doing. With such a benchmark in place, they’ll then be better able to analyse and report upon the data most important to their industry. Companies need to choose a specific reporting framework to follow, too. With several ESG frameworks, each suited to different criteria, selecting the one that most suits the business and its specific needs can often prove challenging.
Barriers to reporting
ESG reporting can be far from straightforward. For one thing, even once the focus and framework have been decided upon, it can take months to produce an ESG report, and display it in a visually appealing and digestible way for investors.
A general lack of knowledge around ESG reporting only complicates matters further. As it’s a relatively unregulated field, there is, to date, no single standardised and universally recognised approach to how it should be carried out. For many businesses coming to it for the first time, just knowing where to start, who to talk to, and how to identify and report on the right issues can be overwhelming.
Bigger businesses will typically hire large sustainability teams to analyse their ESG data and produce an investor-friendly report. But not every company will have the means to allocate these resources. Even if money is available, there seems to be a general lack of understanding as to how sustainability strategy can be integrated into core business activities, in order to identify areas of improvement in products and services.
With investors, stakeholders, and consumers all closely scrutinizing ESG practices, businesses can often find it difficult to retain customers and secure funding. Indeed, without access to these reports, investors will lack the insight they need to identify the potential returns on a sustainable or socially conscious business, and can look to invest elsewhere.
Overcoming the challenges
Technology represents a means of overcoming these reporting challenges. Solutions are now available for everything from providing best practices on the questions to ask stakeholders, to sharing industry benchmarks on ESG issues, and collating the data into appropriate formats.
Blockchain, for example, has been proven as a way of helping smaller businesses address the issue of limited resources. With every supplier and third-party a company deals with existing on the blockchain, their data feeds directly back into the business, where it can be accurately audited and verified.
Cutting out the middleman in this way allows smaller businesses to reduce their investment in time and money while sourcing the same high level of data as would a larger corporation. Presentation is important, too, especially for investors. A simple and visually appealing ESG report, that clearly illustrates a company’s ESG credentials, is more likely to secure funding and preferable terms. Integrating a function that can design and display the information collected into the platform that collects it will streamline the process significantly.
ESG reporting is a vast and complex task but, with the right technology in place, businesses of all sizes can identify, collect, and analyse the information most pertinent to their needs, displaying it in an easy-to-understand format so it meets the needs of every stakeholder. Wider social and sustainability concerns mean ESG is now a mainstream consideration for every company. By democratising ESG reporting, technology has made it accessible to every company – not just those with the biggest budgets.