By: Jessica Camus, Chief Corporate Affairs Officer, Diginex
Growing awareness around sustainability and social responsibility has led to a greater emphasis on Environmental, Social and Corporate Governance (ESG) in financial services. With ESG funds in the US alone capturing more than $50 billion of new money in 2020 – more than double the previous year – it’s hardly surprising that ESG reporting is now considered an industry standard that all companies should follow.
But many businesses, especially those at earlier stages, don’t often have the resources needed to source, analyse, and present the data necessary for this reporting. There is technology now available, to help address these challenges and enable all companies, regardless of their size and maturity, to share the insight into their ESG practices investors now demand.
Sustainability credentials no longer a “nice-to-have”
Concerns around issues such as climate change and diversity mean ESG credentials have become more influential in an investor’s decision-making processes. No longer considered as niche impact investments or small stand-alone funds, ESG investing is now very much mainstream – and it’s paying off. In 2021, for example, 90 percent of European investment manager Candriam’s net sales came from ESG products, compared with between 50 and 60 percent over the previous three years. As a result, its total assets rose by more than 7 per cent in the first six months of the year, boosted by net inflows into its ESG-focused funds.
Indeed, with strong ESG practices reflecting lower investment risk and resulting in significant improvement in operational performance, ESG is now imperative for businesses of all sizes. Today, under rising pressure from consumers and regulators, businesses are increasingly required to showcase their ESG efforts, adhering to industry reporting frameworks in order to remain compliant with regulations as well as enhancing their reputation for sustainability and social awareness.
The requirements of this reporting can be a significant undertaking, though, especially for Small and Medium Enterprises (SMEs), many of whom have limited time and financial resources.
Challenges in ESG reporting for SMEs
Producing an ESG report can take months to complete. Many companies just don’t have that time available when it could be better spent focusing on their growth and operations. Matters are complicated further by a general lack of knowledge around ESG reporting. As a relatively new concept, there is as yet, no single standardised and universally recognised approach. Knowing where to start, who to talk to, and how to identify and report on the issues that stakeholders care most about can be overwhelming.
Most companies will therefore employ external consultants to identify and analyse their ESG data and compile an investor-friendly report. But this can cost tens of thousands of pounds – entirely unaffordable for many SMEs. Given that consumers, investors, and stakeholders are all holding business to account over their ESG practices, this means these SMEs will find it difficult to secure funding and retain customers. Additionally, investors who don’t have access to these reports will lack the insight needed to identify the potential returns on a sustainable business – ultimately limiting the pool of companies they may want to invest in.
Fortunately, SMEs now have technology options available to address these challenges – creating meaningful and insightful ESG reports that will not only benefit their growth prospects but also increase the number of opportunities for the wider investment community.
Leveraging technology to fast -track reporting
Removing significant barriers to ESG reporting that many SMEs are unable to access. Achieving this requires approaching processes for ESG reporting with a more technology-centric mindset. This not only helps automate and validate the data gathering process but also significantly reduces the price point needed to produce an ESG report.
Technology such as blockchain can be an effective tool in managing the ESG reporting process. The blockchain’s immutable nature makes it easier to accurately audit and verify the data to ensure it’s accurate. This way, it’s possible to ‘cut out the middle man’ in the form of the external consultant, sourcing high-quality data at a fraction of the time and money it would take using traditional manual processes.
However, to effectively use any technology, the SME needs to understand what needs to be measured. This materiality assessment will underpin any ESG report produced, identifying the factors that stakeholders value as well as what competitors in the same industry are measuring. This is a fundamental part of the ESG report and should be the first step that any company takes when starting its ESG journey.
ESG is maturing and becoming a standard for businesses everywhere. With less time and resources spent on their ESG data collection, allows many smaller businesses to access new funding opportunities. Likewise, investors can ramp up on their sustainability – focused investments by accessing higher quality data. By enabling any business, regardless of its size, to produce meaningful reports leveraging innovative technology, ESG reporting becomes more democratised for businesses, investors and society at large to benefit.