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ESG Reports: Barriers for Middle Market

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In the wake of corporate scandals and revelations of unethical behavior, it has become increasingly important for companies to create ESG reports. This is because investors are becoming more interested in a company’s environmental, social, and governance performance. Midsize Small-Cap companies have been taking a long time to produce these ESG reports because they often don’t know what information would be required. It can also take them a significant amount of time and money to do so, as well as gaining experience with creating such reports. In order to encourage more of these smaller companies to come forward and provide them with good information on how to make an ESG report we should focus on educating those who work for small businesses about this topic as well as making sure that they have certain information that they can turn into an ESG report easily.

What is an ESG Data Report?

An ESG Report, or Environmental Social Governance report, is a public disclosure of a company’s good and bad behaviors in relation to the environment, social development, and governance. This type of reporting has been required by many investors who are concerned with how ethical a company is as well as how they present themselves to the public.

It is important for small-midsize companies to create ESG reports because it shows them how ethical their company is and that they care about the community they work in as well as what goes into making their products and services. There is an increasing demand from investors and consumers for a company’s ESG Report, and this is why many midsize small-cap companies have been reluctant to create them.

Why should small-midsize companies care?

One of the major reasons why small-midsize companies should care about creating an ESG report is because it can help them attract a larger customer base. It also shows investors that the company they are investing in cares about how ethical they are as well as showing them what they do to be environmentally conscious.

Larger companies have already started to create ESG reports, and it’s important that smaller companies do the same. If they don’t, then investors may lose trust in them because of their lack of transparency. This can cause stocks to fall significantly for midsize small-cap companies which would be devastating for those who own large amounts of its stock.

How will non-compliance affect contracts?

When it comes to small mid-cap companies, one of the most important issues is non-compliance with contractual agreements.

For instance, what happens if a company is not able or willing to report on an environmental aspect that their customer requested? Will they be fined for this? Or will they not be awarded the contract at all? And if so, what can they do to avoid this in the future?

Given that most small companies are not even aware of these reporting requirements or how to go about them, it is unlikely that they will be able to ensure compliance. If they cannot provide their customer with the information they’re looking for, it may cause problems for both parties down the line.

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How will non-compliance affect customers?

Non-compliance can hurt a company greatly because it can cause them to lose business. If they don’t create an ESG report, then many customers will see this as a sign that the company they are purchasing from doesn’t care about how ethical their products are or who is making them. For example, if you wanted to purchase solar panels and your first search was on the internet, then the first company that would pop up is SolarCity. Their marketing and advertising are very visible and it shows how much concern they put into environmental issues as well as their strong focus on solar panels. If a midsize small-cap company didn’t have an ESG report, then most likely people would be more inclined to purchase from SolarCity because their ESG reporting shows how much they care.

For a local private company that does municipal road construction in the Pacific Northwest, it is important to create an ESG report in order to maintain its reputation. If they are not creating reports about what goes into making the materials they use on road construction projects, then many people may lose trust in them when they see how much damage large companies are doing when it comes to environmental issues.

This lack of transparency can also hurt small-midsize companies in the eyes of investors. Many of them are looking for proof that they are creating sustainable products and services which is why ESG reports are so important; it helps to provide them with material they can use when making money decisions.

Understanding the landscape

Since all of this is relatively new, the best way for small-cap companies to go about reporting in their ESG area would be to understand what is required of them. This includes finding out where they are expected to report, what information they are expected to provide, how often they will need to provide it, and who will be responsible for creating and reporting this information.

The first step would be to encourage their customers, partners, and suppliers to provide them with a reporting template that is tailored specifically to their needs and meets any reporting requirements the company may have. This way they can report in line with what is mandated by law or required by their clients.

Another option would be to hire a third party to help them with creating such reports, however, this means the company needs to have sufficient funds and resources available for this purpose. The third option would be working together as a group and sharing other companies’ templates and tools in order to make reporting easier for everyone involved.

Given that most small to mid-cap companies don’t have the necessary knowledge or experience in reporting, it is important that they are able to get the information they need from somewhere. This will make it a lot easier for them to produce these reports and ensure compliance with contractual agreements.

What Is Required?

ESG reports do not need to be extremely in-depth. They just need to provide enough material so investors and consumers can get an idea of how ethical they are when it comes to the environment, social issues, and governance.

As mentioned before, ESG reports do not need to be extremely in-depth or filled with pages upon pages of information. It is important for midsize small-cap companies to include what is important in their area, and not try to put too much information in the report because it will make people lose interest.

For example, when Walmart first started creating ESG reports they included pages upon pages of information about all the different works in progress along with their efforts to recycle old products and materials. It was enough information to make investors feel like they were doing their part when it came to supporting sustainable companies, but for the customers, they didn’t care.

The key with ESG reports is that they need to be short and concise which will allow people to take their time looking at the different issues that are important in your area. For example, a midsize small-cap company will not need information about how they are using renewable energy to generate electricity or reduce greenhouse gas emissions because their area doesn’t use that much electricity. However, they might want to mention the steps they’re taking while building new stores in updating old ones and creating more efficient models which will help reduce waste and save

What should a Midsize Small-Cap company’s ESG Report include?

It is important for midsize small-cap companies to create their own unique ESG report because every business will have different information that customers would be interested in. However, there are certain items that they should have in order to attract customers and investors.

These items may include revenue reports, the number of employees on staff, and how they are involved in the community. It can also include information about worker safety along with environmental factors such as water usage and waste management.

Other things that might be included would be details about the company’s philosophy when it comes to working with suppliers and determining their own unique company goals and standards.

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Where to begin

To begin creating an ESG Report it is important that you have a general idea of what each section entails including the following:

1. Environmental Performance

2. Workplace Environment & Governance

3. Social and Community Development

4. Material Aspects of Business

5. Other relevant topics.

More information on what to include

  1. Environmental performance: This section would include information such as the company’s carbon footprint and its efforts in reducing greenhouse gas emissions. For example, if your company is making green products, or has solar panels on their roofs, it might be worth mentioning. If you are a housing contractor it might address how many trees you plant or how many homes you build that are green energy efficient.
  2. Workplace environment & governance: This section would include things like their diversity policies, benefits for part-time workers, company culture and values, along with efforts to reduce or eliminate child labor. An example would be if the company raised their minimum wage, or offered paid bereavement leave.
  3. Social and community development: This section would include things like how your company is involved in local organizations, giving back to communities, where you donate your money and resources, along with any volunteer opportunities employees have access to. It might also include information about what causes they support or believe in.
  4. Material Aspects of Business: This section would include things like how you are limiting your waste, working with companies to reduce their waste, supplier standards, and operations, along with any items they use that are recycled or environmentally friendly.
  5. Other topics: There may be other things that customers consider important when it comes to ESG reports. This section is an opportunity to provide information that they are interested in. For example, if the company has a strong philosophy for protecting human rights or has made advances with regard to diversity it would be worth mentioning.

It is important that you research each topic and learn as much as possible about it before trying to include something in the ESG report, otherwise, it will make everything else difficult for both you and your readers.

At this point, it is also important that you don’t worry too much about the length of the report because there are still a lot of things to consider when completing each section. The most important thing is that you include everything you want investors and customers to know about your business.

ESG reports do not have a set length, but it is important that they are concise enough so people will take the time to read them. It is also important that you try to include as much information as possible because there might be some things that people would be interested in learning more about.

How does my supply chain affect my ESG report?

Every company has a supply chain. It includes products, people, and processes that help generate revenue. Every company’s supply chain affects the environment, people, and society in many ways. Understanding your company’s impact on the world is key to sustainable business practices. So, understanding your supply chain goes beyond just following best practices, it can save you time and money while also increasing the impact your company makes on the world in a positive way.

Every midsize small-cap (a publicly traded company with between $500 million and $2 billion in annual revenue) has an inherent challenge when it comes to understanding its supply chain, let alone reporting on the environmental, social, and governance (ESG) policies within that supply chain.

Primary vs. secondary supplier

Understanding how your supply chain affects your ESG score is an important part of your company’s sustainable business practices. To break it down, it’s important to understand the difference between a primary supplier and a secondary supplier. Consider this scenario: You purchase an iPhone from Apple, but under their brand name there are other companies that produce the parts for the phone, such as a screen produced by a second supplier. This means that both Apple and your company would have two suppliers in this situation.

When you are purchasing your iPhone, Apple is the primary supplier. However, the secondary supplier is the company that produces the screen for the phone. Understanding who makes parts of what can be difficult for companies of all sizes to identify clearly, but it’s even more challenging for midsize small-caps to have a clear understanding of their supply chain due to their limited resources.

But what is the difference between a primary and secondary supplier? A primary supplier has more of an impact on ESG reporting than a secondary supplier because they are working with your company to directly produce specific goods or services that you market to consumers. Secondary suppliers are just that, secondary. They provide components for your products but not the actual goods that your company markets to consumers.

Small bites of the supply chain

Understanding your supply chain starts by breaking it down into small sections and taking each section one at a time until you understand how every piece of the puzzle fits together. It’s important to include all relevant players in your understanding of your supply chain, including suppliers, distributors, and logistics providers. The more information you have about who makes what, the better you can manage your supply chain.

Knowing more about your supply chain will affect your ESG score because it’s key to understanding how you are contributing to society with each product or service that is being produced. This understanding will help you identify how to contribute positively in the future, and also allow your company to pinpoint what areas need improvement.

…research shows that millennials are shifting their purchasing habits to align with more socially and environmentally conscious companies…

The real focus of reporting

The whole point of ESG reporting is not just about following best practices but rather improving upon the current state of your business – which means part of that process is identifying where you can improve your supply chain so that it becomes more sustainable in the future.

The good news is that with the right processes in place, you can easily understand your supply chain – even for midsize small-caps. Identifying all relevant players in your supply chain begins when making purchasing decisions. Before doing any business with a supplier, make sure they are willing to answer questions about their environmental policies, social responsibility, and governance practices. Then, collect all of the answers you receive from suppliers, distributors, and logistics providers so that you can have accurate information on each part of your supply chain.

Is my company ready?

Before you start creating your ESG report, it is important that you determine whether or not your company is ready. Your company should be sustainable and have a good reputation before starting this process. For example, if the majority of people think your business practices are unfair or question why they would want to do business with you, it can affect what people will think about your ESG report.

This is why it is important, to be honest and transparent when explaining what your company is doing to address the concerns of people in the community. If you have been ignoring these issues, it will be difficult for you to rectify them with a simple document that has not been carefully thought out or planned.

What are the benefits of creating an ESG Report?

ESG reports are important for midsize small-cap companies because it helps them show people they are doing their part to make a positive impact on the world around them. It also shows customers that you care about the planet and the industry in which your company is involved.

Customers might want to look for companies that are more environmentally conscious, but they can’t do so if the reports aren’t made available. Many people like to search for this information on the internet because it is easy and readily available. If you don’t provide it then your business might not be as successful as you would like.

What are the most common barriers to ESG Reporting?

The most common barriers to ESG Reporting for midsize small-cap companies is the cost and the time it takes to produce these reports. It can be difficult for a company to invest in an outside firm and hope that they will create all of the necessary documents for them, especially when they don’t know exactly what they should be looking for. At this point, you might also need to spend time training them to produce this kind of information, which can cost you money as well.  Depending on the company you are working with, they might not be able to give you an accurate estimate on how much it will cost until they have already started.

Another problem with ESG Reports is that midsize small-cap companies don’t always have the time to produce them. This is because they are busy with other tasks, or are still learning how this process works.

They do not want to disappoint their customers by taking too long to create a report, which can make it difficult for them to plan out enough time for this project. It all comes down to having the time and financial resources to make this report happen, which is something many of these companies don’t have.

How will ESG reporting change the world?

ESG reporting will change the world in a variety of ways. Firstly, we’ll see more transparency and we’ll be able to hold companies accountable for how they run their company and make decisions. We’ll also be able to see how responsible these businesses are in running with environmental and social priorities. Finally, with visibility and transparency amongst ESG reports and all the companies that operate in compliant countries, we can bring more attention to environmentally-friendly products, services, and initiatives.

For example, research shows that millennials are shifting their purchasing habits to align with more socially and environmentally conscious companies, as opposed to those that focus on short-term gains. Thus, we’ll be able to see how some businesses will change the way they operate as a result of more ESG reports and increased demand for eco-friendly products and services. Eventually, as more and more companies in more and more countries comply with ESG principles, we’ll see a more sustainable business environment overall.

Once this happens we will see an increase in demand for more sustainable products and services. For the first time, the general public has access to information about the impact companies are having on natural ecosystems – both good and bad. Thus, with an increasing number of ESG reports, we’ll be able to see which businesses are operating in sustainable ways that are most beneficial for our environment; or if they’re inadvertently harming it.

What is standing in the way of more companies creating ESG reports?

According to a recent  Deloitte Insights article, there are several barriers that midsize small-cap companies face when trying to create an ESG report.

  • The first barrier they outline is that these companies don’t know what their disclosures would consist of and might not have the time, money, or experience to produce such a report.
  • The second barrier is that they still think it’s “optional” and therefore need more information on why creating such a report is necessary.

What is the global reporting initiative?

The Global Reporting Initiative (GRI) is a globally recognized standard for sustainability reporting. Many companies are utilizing their G4 guidelines in order to produce reports that disclose the company’s sustainable practices, impacts on both society and the environment, how they are working towards reducing their environmental footprint, etc. However, smaller companies providing less than $100 million USD in revenue per year are not required to report under this GRI standard, and can instead use the G3 guidelines.

What is a Global Reporting Initiative Sector Supplement?

A supplemental reporting framework published by the Global Reporting Initiative (GRI) provides additional guidance for companies that want to disclose information in areas beyond climate change. There are ten sectors, including energy, agriculture and forestry, materials, financial services, and consumer products among others. [In order to give a more concrete example] the GRI Sustainability Reporting Sector Supplement for Food Products is a good option for companies in the food product industry. It provides a framework in which a company can easily examine their own processes and practices, and disclose what information they need to.

What are the G3 Sustainability Reporting Guidelines?

The Global Reporting Initiative’s third generation of guidelines focuses on improving the environmental, social, and economic performance of an organization. The G3 is divided into three sections: transparency, materiality, and credibility. Transparency is only required for midsize small-cap companies and outlines the information a company must disclose based on their industry. Materiality is broken down into two categories: core indicators and corporate responsibility topics that are relevant to many industries. Credibility indicates how a company should report, spend money on research, and disclose stakeholders.

 

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In summary…

Ultimately, if small and mid-cap companies want to be more involved and engaged with their stakeholders, they cannot do this unless they are willing and able to provide the right information. While there may be some issues that can be worked out on a case-by-case basis, such as the one mentioned about not being fined for non-compliance, it is important that we encourage companies to come forward and report in order to benefit both their customers and partners.

If companies can see that reporting is beneficial for them, we may see more of these companies produce the reports, which would be a great step forward for everyone involved in such transactions. At the very least they should know what information they will need to provide in order to create such reports and how to go about doing this.

These are all things that can prevent midsize small-cap companies from creating ESG reports. However, if more of them were aware of what was required for these documents, they might be more willing to try it out. It’s important that we encourage more of these companies to come forward and provide them with good information on what is required in order to make such ESG reports.

Caveats and Disclaimers corporate leaders and asset managers

We have covered many topics in this article and want to be clear that any reference to, or mention of leaders, asset managers, strategy, financial analysis, factors, accounting standards, disclosures, investing, capital markets, business strategy, efforts, reports, issues, financial portfolio investment analysis, economic inequality, climate change, material factors, responsible investing, supply chain investments, reporting, net present value, particular business, company’s strategy, companies communicate, operational efficiencies, world economic forum, financial integration, investment managers, standards, fossil fuels, sustainable investing, fiduciary duty, measurement, institutional investors, embedding, more than half, negative screens, many investors, value creation, value chain, information, purpose, improved criteria, supply chains, non financial ratings, financial results, financial impact, carbon footprint, significantly outperform, net present, identify opportunities, investment decisions, other stakeholders, carbon emissions, reporting standards, many managing director, consumer goods, same time, disclosure requirements, social or better data in the context of this article is purely for informational purposes and not to be misconstrued with investment advice or personal opinion. Thank you for reading, We hope that you found this article useful in your quest to understand ESG.

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