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Challenges and Opportunities in ESG Reporting for SMEs

SMEs are an essential part of our economy and the biggest source of innovation and employment. The transition to a low-carbon economy and uptake of ESG is well underway and and, in my opinion, SMEs must be central to successful progress .

ESG reporting encompasses quantitative and qualitative disclosures to measure an organisation’s ESG performance against risks and opportunities. In particular, ESG reporting, provides a clear picture of the business’s impact in the three areas (environmental, social and corporate governance) for stakeholders.

Why ESG reporting represents an opportunity?

Many SMEs do already embrace the ESG opportunities. High-quality ESG reporting builds trust with stakeholders and demonstrates that a company understands how ESG criteria affects its ability to create long-term value. Future-focused companies with strong ESG performance have demonstrated higher ROI, better resiliency and lower risks. Improved environmental and social performance can also enhance internal management and provide access to capital markets.

Another reason why ESG reporting is important is that it provides organisations with an opportunity to be transparent and to improve brand reputation, which can present a favourable position to investors.

But ESG Reporting has its challenges…

Any SME company knows how difficult it is to report on financial issues, let alone on its carbon footprint or the transparency of its supply chain. Additionally, ESG reporting frameworks are complex and fragmented, with many SMEs finding them discouraging to engage with. Recent data from the Global Reporting Initiative shows that only 10-15% of companies using their standards are SMEs. This is perhaps understandable given the complexity of the frameworks and competing demands for data from customers and financial institutions.

It can also be costly for SMEs to hire a consultancy firm or a team of data analysts for sustainability data gathering and often these costs fall outwith their operational resources.

There are some simple steps businesses can take to overcome these challenges:

  1. Identify the ESG issues that impact your business – This involves talking with customers, partners, employees and investors to understand what issues matter the most to them. This helps the company establish its values.

  2. Identify relevant frameworks – By doing some in house research companies can understand which of the frameworks available meet their needs. Starting small with a few metrics to track is recommended as opposed to trying to tackle everything at once.

  3. Collect the data you need – Initially SMEs can start to capture the data required for the initial metrics manually and, over time, tools and techniques will become available that can help to automate the process which in return can reduce costs.

  4. Be transparent – The ESG reporting standards stand up against greenwashing to engender trust in the process, so it is important, once you begin collecting the data, that it is robust and defendable.

  5. Return to Step 1 – ESG reporting is an ongoing process. SMEs can make improvements and meet their ESG targets only once they have established their baseline against the metrics they want to improve on.

SMEs as the major proportion of the global economy will stand in the spotlight, and those who start their ESG reporting now, demonstrating their commitment to investors, gain an early adopter advantage. Now is the time to act in order to take advantage of technological developments that will make ESG reporting more accessible and get ahead of the game.

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