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Given the busy nature of the modern corporate environment and its accompanying time-pressures, it’s logical to assume that only the tasks that are mandatory and required are the ones to get done.
After all, why would you take on more work voluntarily when there’s an endless queue of important and necessary items waiting for your attention?
Surprisingly, when it comes to organizational ESG and sustainability reporting, companies are increasingly taking action – and completely voluntarily too.
Why would companies voluntarily report on their ESG and sustainability metrics?
ESG disclosure and reporting is becoming increasingly mandatory.
Regulations like the Corporate Sustainability Reporting Directive (CSRD) and Sustainable Finance Disclosure Regulation (SFDR) in Europe, and the new climate laws in California (SB 253 and SB 261) are going to force companies to report on their sustainability.
However, these regulations are mostly applicable to big companies, and the average small or midsize enterprise (SME) is generally not subject to them. Despite this, increasing number of small and medium sized businesses are making a concerted effort to report on their sustainability metrics, just like big corporations are being forced to do.
Why?
Pressure.
SMEs are feeling the pressure when it comes to reporting on their sustainability metrics. They don’t have regulatory pressure to do mandatory reporting like the big companies do, but they are feeling the pressure in various other ways.
1. Supply chain pressure
SMEs may be part of a supply chain which is subject to mandatory regulatory reporting at one of its levels.
This can have an impact on the other businesses in the supply chain – if a big corporation or original equipment manufacturer (OEM) has mandatory emission reporting
requirements for example, scope 3 emissions regulations dictate that it needs to disclose the emissions it is indirectly responsible for up and down its value chain.
This places a corresponding onus on its smaller supplier businesses, as they now need to provide their own emissions data to the big corporations/OEMs.
Other business partners may require it too. Increasingly, companies are creating sustainability standards to which they hold their partners, as part of efforts to green their own businesses.
Organizations that do not report on their carbon emissions and other sustainability metrics may find themselves increasingly out in the cold from a business perspective as the overall business environment shifts towards a more environmentally-friendly ethos.
2. Investor pressure
Modern business investors want to see some type of reporting from their companies on ESG and sustainability matters.
Not only does it ‘look good’ to a wider audience, reporting across a variety of ESG measures also has a substantial benefit to it in terms of risk analysis and mitigation.
Corporate risks identifiable through the ESG lens provide a broader view than a pure focus on financial disclosures, giving investors a wider perspective on the overall business situation and enabling more informed decision-making.
SMEs are thus also facing pressure from their own boards and investors to report on their ESG matters, in an attempt to get as complete a picture of their investments as possible.
Furthermore, financial institutions like banks and insurers are now factoring ESG disclosures into their lending and insurance criteria.
SMEs wanting to have unhindered access to capital and favorable insurance rates need to be able to satisfy financial institutions’ request for this type of information.
3. Customer pressure
The deluge of gloomy headlines regarding the climate crisis have raised the awareness level of the general public around matters of environmental sustainability, and the average consumer has accordingly become more discerning in terms of where they choose to spend their money.
While pragmatic reasons like price and availability still play a major role in customer buying behavior, more and more consumers are allowing visibility around environmental, social, and governance matters play an important role in their purchasing behavior.
SMEs are now feeling the pressure to increase the visibility and transparency of their efforts in these areas, for fear of falling afoul of negative customer sentiment and suffering a deteriorating brand reputation.
4. Competitive pressure
Competitive business pressures can be intense – and the sustainability reporting aspect is no different.
As we’ve covered above, businesses that make an effort to properly disclose and report on their ESG and sustainability metrics can benefit from:
- More inclusive business networks and receptive partners
- Improved situation analysis and business risk mitigation
- Better access to capital at more favorable rates
- An increased chance of being well-regarded by consumers
These are important advantages, and no business would want its competitors to enjoy these benefits on an ongoing basis with no challenge.
However, for those businesses that are delaying reporting on their ESG and sustainability concerns, that is exactly what is happening.
Rivals are getting a march on them and enjoying the added benefits which come with having an implemented ESG management and reporting strategy.
Taking action to improve ESG and sustainability reporting
So why are companies doing ESG and sustainability reporting even when they don’t have to?
In a word, pressure.
Pressure from their supply chain, business partners, investors, customers, and competitors.
And although pressure is often portrayed negatively, it can also act as a motivator towards taking action for the better.
A business that acts responsibly on the pressures listed above is likely to improve in various important areas, such as developing enhanced processes and systems to ensure supply chain compliance, the adoption of ethical practices, and contributing positively to the community and the environment.
It also sets itself up for further long-term success by evaluating risks from a broader sustainability perspective rather than just focusing on financial performance, improving its relations with its business partners and customers, and helping to build and sustain the environmental conditions conducive to its continued business operations.
Companies are thus increasingly responding to these pressures in a positive manner and using them as a spur towards improving their ESG and sustainability management and reporting.
It’s why they’re doing ESG reporting – even when they don’t have to.
