What is ESG reporting and why does it matter for SMEs on the journey to Net Zero?

This article was written in collaboration with Greenpixie for Earth Day 2022.

One key takeaway of the latest report from the Intergovernmental Panel on Climate Change (IPCC), was that to stay below or at an average temperature rise of 1.5 degrees celsius, investment is needed. Three to six times more investment than what is currently being put towards climate solutions. 

The UN’s Financing for Sustainable Development Report 2022 states that up to now, investments made in sustainable products have been made because investors believed that they would see a financial return. Sounds obvious, right? If you make an investment, the idea is that you make a percentage return on that investment. But the question, when it comes to achieving a sustainable future (or some may argue, when we are facing a potential 3’C rise, any kind of future at all) is: should that be the only return you want to get on your investment? 

The UN argues not, and that ESG (environment, social and governance) criteria for investment is – as it stands today and to put it bluntly – missing the point, by not measuring the impact of a business on the environment or society at large. 

What is ESG reporting?

Reporting on ESG criteria is now expected not only by investors, but also by customers, business partners, and other key stakeholders. 

Just like any business report, ESG is a disclosure and analysis of data – in this case, the data covers a business’ policies and operations in the areas of environment, social and corporate governance. It provides more stringent criteria and guidance than the previously used ‘Sustainability Reporting’, where the definition of the word ‘Sustainability’ has the potential to be interpreted in interesting ways.

Let’s break ESG down:

  • Environment considers a business’s impact on the planet, taking into consideration things like carbon emissions, water use, pollution, waste management, natural resource conservation and deforestation. 
  • Social considers a business’s impact on people, looking at how its actions, practices and culture affect its workers, customers, stakeholders and wider society. Social reports on impact such as employee engagement, customer satisfaction, diversity, inclusivity and human rights, as well as privacy policies and data protection.
  • Governance considers a business’s internal checks and balances – its policies, practices and legal obligations, for example, how its board is composed, how it remunerates employees and executives, shareholder rights, recruitment policies, whistleblower programmes and corruption policies. 

According to a 2021 European Corporate Governance Institution study, 25 countries have introduced mandates for ESG disclosure; however, most of these are applied only to state-owned or listed companies, or large corporations. Even though ESG reporting is not mandatory for the majority of smaller businesses (yet), there is a strong argument that it should be part of any business’s reporting, particularly one on its journey towards sustainability. 

Why is ESG reporting important for all businesses?

1. Increasing ESG legislation is going to affect your business.

Have you heard of The Sustainable Finance Disclosure Regulation (SFDR)? SFDR imposes mandatory ESG disclosure obligations for asset managers, bankers, financial advisors and insurers. It was introduced by the European Commission, alongside the Taxonomy Regulation and the Low Carbon Benchmarks Regulation. (KPMG, 2021).

Generally speaking, sustainable investment is a long-term strategy that aims to benefit society by influencing the behaviour of companies. And it’s clear that financial sector legislation directly impacts business behaviour, as the investment managers are able to apply influence on the companies in their portfolio. (Deloitte, 2021).

So far, only Scope 1 & 2 has been mandatory in this legislation, however, starting from January 1, 2023, Scope 3 emissions (supply chain) will also be added to this list. (Nordea, 2021). Tools to accurately measure Scope 3 emissions are few and far between, despite these often being the biggest emitters for many businesses – more on this later. This trend is only set to grow, therefore, it will be increasingly important for businesses to be able to accurately measure Scope 3 CO2 emissions and use a standardised method of reporting ESG transparently, in order to be in line with the SFDR mandate.

2. People want to do good – and that includes your stakeholders.

If you put ‘ESG reporting’ into any search engine, you will be hit with hundreds of articles about reporting for the sake of attracting and appeasing investors. And while this is a valid and evidenced point (a survey by the CFA Institute found that 85 percent of investment managers are increasingly incorporating ESG criteria into investment decisions), there is also evidence that individuals are looking beyond simply financial performance from companies. 

The aforementioned Financing for Sustainable Development Report 2022 from the UN references a number of surveys of pension funds from the UK, the Netherlands and Australia, which found that the majority of participants desired their pensions to “do some good”; to align with the UN’s Sustainable Development Goals, even at the expense of financial performance; or to at least be transparent about the positive and negative impacts their investments are having on people and the planet.

3. If you look after the E, S and the G, and the F will take care of itself.

Well, it’s not quite that simple, but studies have shown that considering ESG responsibilities in a business can result in better financial performance, even improving operating profits by as much as 60 percent (McKinsey, 2020). 

4. Attract, and retain, the right talent.

Sustainability matters when it comes to attracting the right people to work, and stay working, in your business. By 2029, Millennials and Gen Z will make up 72 percent of the global workforce. Research by Marsh & Mclennan in 2019 found that when faced with multiple job offers, nearly 40 percent of Millennials have chosen the employer that was environmentally sustainable. A strong ESG commitment can also increase productivity and boost employee motivation.

How does ESG reporting fit into achieving Net Zero?

Achieving Net Zero carbon dioxide emissions (that is when the amount of greenhouse gases going into the atmosphere is balanced by removal out of the atmosphere) is crucial to avoid global temperatures rising above the 1.5’C. At Net Zero, temperatures will stabilise.

Many businesses, of all sizes, are making the commitment to achieve Net Zero by 2050 and for good reason. A study by CDP found that the combined carbon footprint of SME suppliers is, on average, 5.5 times greater than large corporations. But, this is not included here to berate our fellow SME community, quite the opposite. This is a huge opportunity for us. But where to begin? Making a commitment is a great first step, then what?

As James Harrington said, “If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” 

And this is where ESG comes in, because it provides a structure and a set of criteria through which to measure the impacts of a business on people and the planet. It is impossible to set benchmarks for improving the impact of something, without first understanding what that impact is.

The challenge, and the opportunity.

To achieve Net Zero, a business needs to look at cutting the emissions it releases into the atmosphere, alongside ways to remove carbon from the atmosphere. Offsetting the emissions of a business, for example, by planting trees, or by funding projects that absorb CO2 emissions from the atmosphere, is certainly a step in the right direction, but does not address the immediate requirement to reduce emissions getting into the atmosphere in the first place. A bit like plastic recycling alone, without stemming the tap of plastic production, isn’t going to solve the problem of plastic pollution. 

Another challenge of achieving Net Zero is understanding all of a business’s greenhouse gas emissions. When we think of our business’s emissions, we can categorise them into three groups, or ‘Scopes’. As promised somewhere up above, here is more on Scope 1, 2 and 3:

  • Scope 1: direct emissions from owned and controlled sources, e.g. from running a business’ facilities or vehicles. 
  • Scope 2: indirect emissions from owned or controlled sources, e.g. from the generation of purchased goods and services such as electricity, steam, heating and cooling.
  • Scope 3: all other indirect emissions that occur in a company’s value chain. E.g. employee commuting, business travel, how sold products are used, waste disposal, franchises, investments, transportation and distribution.

(Sources: carbontrust.com and Plan A Academy)

Scope 3 is largely unaccounted for in ESG metrics and as mentioned, there is a lack of tools to help businesses deal with their Scope 3 emissions. 

Now for the opportunity part. 

One considerable Scope 3 emissions culprit is digital carbon. In fact, digital emissions now account for more than 4 percent of global carbon emissions, which is more than the entire aviation sector. This means that understanding the environmental impact of cloud computing and digital carbon can be your business’s first giant step towards achieving Net Zero. 

How do I measure and report ESG in my business?

Reporting of ESG must be ongoing, visible and part of a wider programme of accountability. A survey carried out by Diligent found that fewer than half the organisations surveyed had a formal, documented ESG programme in place, and only 9 percent were using software to collect, analyse and report on their ESG data.

But don’t worry, it doesn’t have to be a big, scary, 100 page document or a 50-tab excel spreadsheet. ESG has been around for a while now, which means ways and tools of measurement and reporting are becoming simpler and more accessible for SMEs.

If you want to learn more about how to measure and report on ESG in an effective way that doesn’t involve archaic excel spreadsheets, make sure you join our “Race to Net Zero” masterclass this Earth Day, Friday 22nd April, with Rory Brown, Head of Digital Carbon & Sustainability at Greenpixie. Attendees will also be eligible for a FREE website report from Greenpixie to help get started on their Net Zero journey. Head to https://bit.ly/RaceToNetZero to grab your spot.

Source
Financing for Sustainable Development Report 2022InvestopediaInvestment MonitorSource IntelligenceGobySustainability Knowledge GroupSpheraPWCThe Fintech TimesForbesThe Fintech TimesGobyDevelopment FinanceSustainability Knowledge Group
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Charli Ferrand Higgins

After a decade working for global and boutique PR and Marketing agencies in Sydney, with clients that included some of the biggest consumer brands in the world, Charli returned to her homeland of the UK in 2017 and decided the time had come to use her professional skills and experience for good. She has since split her time between supporting passionate, purpose-driven small and medium-sized businesses to grow through conscious content marketing, managing and editing the planet-positive content hub Earth Collective (weareearthcollective.com), and hosting the podcast Easy Being Green? Lessons in sustainable business for SMEs.

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