Private companies face increasing pressure to improve their ESG practices, but many are viewing it as an investment for the future and an opportunity to attract talent and access cheaper, sustainability-linked finance, writes Kerry Stares, partner and director of responsible business at Charles Russell Speechlys.
In recent years, the ESG spotlight has steadily widened to include privately-owned companies and institutional investors in the private markets. This is partly because there is a growing recognition that global climate and development goals will only be met by harnessing the growing size, reach and influence of private companies and private capital.
New mandatory corporate ESG reporting requirements, which are evolving at pace at regional and national levels, tend to bite on public or the very largest private companies but are designed to cascade through investment and supply chains and permeate the entire private sector.
Take, for example, the UK government’s plan – set out in its March 2023 Green Finance Strategy – to consult on a requirement for the UK’s largest companies and investors to publish their Net Zero Transition Plans. If this is introduced, larger organisations must engage with their entire value chain to assess their full carbon footprint.
The new European Corporate Sustainability Reporting Directive, which came into force in January, requires some 50,000 organisations to report (among other things) information relating to the environmental and social due diligence they have conducted on their value chains, meaning smaller businesses are set to have their social and environmental footprints more closely scrutinised.
Get your ESG house in order, whatever your size
Through these cascade mechanisms, policymakers intend that all businesses will be held to higher ESG practice and reporting standards. For many private companies, however, the ‘enforcer’ is likelier to be a key investor or customer than a regulator. Moreover, while several private companies have been investing in ESG for years and are market leaders, many, large and small, are coming to ESG relatively recently and are under considerable pressure from stakeholders to catch up.
Many private companies faced with tackling integrating ESG thinking from scratch are understandably daunted, partly because of the scale of the task done properly. Improving your impact on people and the planet necessitates looking outside your direct business operations and getting clear on the ESG credentials of your value chain. For many businesses, this can be a complex, time-consuming, costly process that frequently uncovers new issues.
Data collection is key
Many mid-market private businesses do not yet have the necessary in-house capacity or expertise on ESG, which means issues land on the side of a busy person’s desk, often the GC, Head of HR or COO. Many also lack the processes needed to make rapid progress – particularly around data collection. This is critical for achieving best practices on ESG, as businesses need to set quantitative targets, measure progress regularly, report to stakeholders and, increasingly, align remuneration and incentive schemes with ESG performance.
ESG data collection and reporting can be particularly challenging initially for smaller B2B businesses whose large corporate customers want information about different ESG issues using their preferred metrics or reporting format. This can look very expensive, particularly in a difficult inflationary economy.
ESG as an investment
In my experience, however, many mid-market private businesses view ESG-related spending as an investment, not a cost. Moreover, there is a growing appreciation that the direction of travel is one way, that expectations of business on ESG will continue to ramp up, driven by more (and more onerous) regulation, particularly as we approach key climate tipping points in 2030.
Getting out ahead of it is increasingly seen as ‘future-proofing’. To borrow a Chinese proverb: the best time to invest in understanding and improving the impact of your business was twenty years ago. The second-best time is now.
We also increasingly see mid-market private companies thinking beyond mitigating the indirect risks of new ESG regulations and framing improved ESG performance as value-additive, whether by minimising waste, attracting and retaining the best talent, finding new impact-conscious customers and investors, or accessing cheaper, sustainability-linked, debt finance.
For businesses making this investment in ESG, there is more good news. While there is still a proliferation of ESG standards and a great deal of divergence between them, there is much more guidance and clarity today about ‘what good looks like’ than ever before and serious efforts by leading standard setters towards interoperability and harmonisation.
We will start seeing the fruits of these efforts in 2023, with the publication of the International Sustainability Standards Board’s global ESG baseline reporting standard and guidance from the UK Transition Plan Taskforce on preparing and publishing corporate Net Zero Transition Plans.
© 2023 funds europe
