ESG REPORTING: THE MID-MARKET’S ROUTE TO ACTION ON SUSTAINABILITY

For mid-market businesses, navigating the environmental, social and governance (ESG) landscape is a complex challenge, and their approach will depend on size, maturity, sector – and the priorities of stakeholders.

The expectation for ESG issues to be embedded in business operations, alongside regulatory developments which are making some sustainability reporting – such as greenhouse gas (GHG) emissions in the supply chain – mandatory for all businesses, means companies need both a strong ESG position and transparent reporting.

“Everyone knows that addressing climate change and building a more sustainable future for all is the most serious challenge for a generation,” says Peter Bodin, CEO of Grant Thornton International Ltd. “Unless we take emissions reporting as seriously as the damage emissions are causing, we will not make meaningful progress in tackling climate change. That is why we are calling for governments and regulators to accelerate the publication and adoption of consistent sustainability reporting standards.”

Multiple stakeholders are pressing for a more ESG-centric business model, including shareholders, clients and staff.

“Investors and creditors are making investing and lending decisions influenced by corporate ESG practices. Accordingly, having an ESG position can change the cost of capital,” says Trent Gazzaway, global leader – service line capabilities and quality for Grant Thornton International.

“Customers also want to have more sustainable products, and we see candidates in job interviews asking about corporate sustainability policy,” adds Esther Wolfs, partner in the Sustainable Impact Services Unit at Grant Thornton Netherlands.

But the ESG umbrella is too broad for mid-market businesses to address every issue. Among Grant Thornton’s clients, the areas currently gaining traction are sustainability, reporting, and social issues.

“Many mid-market businesses are still at the beginning of their ESG journey. Their starting point is often a request from their customers to calculate their carbon footprint,” says Annie Sebelius, chief sustainability and communications officer at Grant Thornton Sweden. “Businesses want to understand their own carbon footprint and the regulatory demands of their sector. Then the next step is their supply chain. What happens before materials and products reach their business? They recognise that their ESG policy work cannot only be done within the business itself, it needs to expand to a wider scope.”

Reporting as the catalyst for ESG action

Reporting is the key to understanding a business’s ESG position and tracking ESG performance throughout its supply chain. For SMEs, most reporting is still voluntary, often based on the Task Force on Climate-Related Financial Disclosures (TCFD) – but with the upcoming implementation of the ISSB global standards (see the ESG reporting frameworks timeline), reporting of Scope 3 GHG emissions will become mandatory in early 2023.

The COP27 UN Climate Change Conference in Egypt this November will underline the actions required to meet environmental targets – including reporting – with a focus on implementing the Paris Climate Accords. “The global community needs to work together to achieve the Paris goals. The mid-market is an important stakeholder in that community,” says Wolfs. “To achieve a net-zero future, they need to look at reducing their emissions, how they’re going to drive the green technology revolution, and how to access climate finance to scale up adaptation.”

This represents an opportunity for businesses to deliver value by meeting ESG targets. “For big companies providing major solutions to global challenges, they’ll have a raft of new work following COP27 as governments look for support to take the actions needed – and all the companies in their value chain will thrive in the wake of it,” says Sebelius.

An established reporting structure allows companies to demonstrate their contribution to the Paris Agreement. Following the advent of the International Sustainability Standards Board (ISSB) at COP26, a workable, universal framework is close to being released.

“ESG reporting plays an important role. The journey to net-zero means having the goals and the strategy in place, then being able to back it up with reports to show the business is making progress,” says Carroll. “They need to have that data available and be able to interpret it.”

The mid-market’s ESG reporting journey

As part of our 2022 International Business Report (IBR), Grant Thornton asked around 5,000 mid-market business leaders in 28 countries about their current GHG emissions reporting. Of those reporting or planning to, the main benefits cited were contributing to the goal of net-zero (29%); increasing competitive advantage (29%); making informed decisions about the sustainability of the business (29%); and boosting readiness to deal with climate-related risks (27%).

The mid-market’s preparations for the incoming ISSB standards include following developments and planning their approach (36%); looking at internal reporting processes in preparation for the new standards (36%); and actively trialling new reporting processes before new standards become mandatory (34%).

Despite the clear benefits, the early adoption of ESG reporting is restricted by a lack of guidance on what data needs to be gathered and how it should be reported. “It’s a question of knowing what information to acquire, and what to do with that data. The scenario analysis is challenging, and many businesses don’t know where to start,” says Carroll. This can be especially hard for mid-market companies, which may lack the resource to fulfil reporting intentions.

For GHG emissions reporting, Scope 1 covers direct emissions from a company; Scope 2 covers indirect emissions from electricity purchased and used; and Scope 3 covers all other indirect emissions from the value chain. Among our IBR respondents, 67% report on Scope 1 and 2 emissions, but only 14% are already reporting on Scope 3. That 86% of the mid-market is not reporting at this level highlights a worrying lack of comprehension of the incoming ISSB regulations.

This concern is compounded by the risk that ESG reporting could be further deprioritised in the face of the current economic and geopolitical backdrop. “There’s Covid. There’s the war in Ukraine. These led to a cost-of-living crisis, energy crisis, and food crisis. ESG and its reporting need to be a priority; businesses need to be aware of the urgency of incorporating it into their strategy, because the climate crisis is the biggest crisis of all,” warns Wolfs.

The time to act is now

Preparing for ESG reporting requirements means immediate action, and significant investment. “Businesses need to invest in resources, invest in training, invest in their people, maybe in a third-party expert,” says Carroll. “They must understand the requirements, understand what Scope 1, 2 and 3 emissions are; and start trying to gather this information. To report in 2023, they need to understand what happened in 2022, even if, in the final standard, the ISSB does not require them to report comparatives,” says Carroll.

“For Scope 3 reporting requirements, you need the whole supply chain reporting to make it work,” she adds. “And how far to go down the supply chain is another question everybody is asking.”

At Grant Thornton, we’re well-placed to help businesses respond to the shifts taking place in the ESG reporting agenda, and the transition to the ISSB’s global reporting framework. “Our advisory professionals can help companies develop efficient and effective ESG plans. Our tax professionals can identify tax savings opportunities driven by corporate ESG actions. And our audit professionals can provide independent assurance of ESG disclosures,” says Gazzaway.

“We help clients make sense of what’s coming their way, and create insight on how this change is going to impact their business resilience,” adds Wolfs. “We interface the business with ESG issues, and evaluate the dependencies and impacts. Then they can prepare the business to anticipate and respond to ESG-related risks and opportunities by developing a concrete roadmap to navigate this landscape.”

For support on ESG reporting and developing your wider ESG strategy, including risk analysis and supply chain mapping, contact us if you need help on this.