ESG Reporting Frameworks: Navigating the Labyrinth

ESG reporting is still in its early days. With multiple frameworks existing already and many more emerging, SMEs will find themselves receiving many conflicting or uncoordinated requests. For those tasked with communicating their organization’s sustainability information, these are challenging times. The aim of this guide is to help SMEs understand why they have to communicate their ESG progress, what they have to communicate, and to whom.

Why Should SMEs report their ESG data?

• Transparency and Accountability:
  • SMEs reporting their ESG data, on Tese for example, can demonstrate transparency and accountability to stakeholders, including customers, investors, and the community. This transparency helps build trust and credibility!
• Risk Management:
  • ESG reporting also allows SMEs to identify and manage risks related to environmental, social, and governance factors. We discuss what some of these risks are in our SASB piece. By understanding and mitigating these risks, SMEs can protect their business operations, as well as their reputation.
• Access to Capital:
  • Investors, and banks alike, are increasingly considering ESG factors when making investment or loan decisions. SMEs that report on their ESG performance can attract a wider pool of funds and access capital more easily. And sometimes at an even cheaper cost.
• Competitive Advantage:
  • ESG reporting can provide SMEs with a competitive advantage by showcasing their commitment to sustainable and responsible business practices. This can differentiate SMEs from competitors and attract environmentally and socially conscious customers.

• Regulatory Compliance:
  • In many jurisdictions, there is a growing trend towards mandatory ESG reporting requirements, especially in Europe, the UK and the US. By proactively reporting on ESG data, SMEs can prepare themselves for potential future regulations and compliance standards. For more information on the latest regulations, visit our ESG Rulebook.

• Long-Term Sustainability:
  • By measuring and reporting on ESG data, SMEs can integrate sustainability into their long-term business strategies, which are key to achieving both near-term and long-term benchmarks. This also enables them to adapt to changing market dynamics and contribute positively to the environment and society.

What are some of the general reporting requirements?

1. Describing sustainability policies in place These policies are often tailored to the specific industry, size, and geographic location of the company, while being aligned with international standards and regulations related to sustainability and corporate responsibility. They typically encompass a range of commitments and guidelines designed to minimize the environmental impact of their operations.
2. Declaring the actual or potential Principal Adverse Impacts on sustainability matters (this is how the SME activity can have a negative impact on the environment) and the actions in place to monitor, prevent, mitigate, or remediate such actual or potential adverse impacts.
3. Listing the main risks linked to ESG matters that are or could impact the SME and how those risks are managed.
   • Environmental Risk Examples:
     • Climate Change Impact: SMEs are susceptible to the physical and transitional effects of climate change, such as extreme weather events, resource scarcity, and regulatory changes.
     • Risk Management: Implementing energy-efficient practices, adopting renewable energy sources, and conducting regular environmental impact assessments can help SMEs mitigate climate-related risks.
   • Social Risks Examples:
     • Workforce Health and Safety: Ensuring a safe and healthy work environment is critical for SMEs, as workplace accidents or health-related issues can impact employee well-being and productivity.
     • Risk Management: SMEs can manage social risks by adhering to occupational health and safety standards, conducting regular training sessions, and promoting a culture of safety within the organization.
   • Governance Risks Examples:
     • Ethical Business Practices: All business, SMEs included, should generally not engage in unethical practices, such as corruption, bribery, or fraud, can damage a company's reputation and lead to legal consequences. Ignoring human rights issues within the supply chain can result in reputational damage and legal liabilities.
     • Risk Management: SMEs should establish and enforce robust governance frameworks, codes of conduct, and anti-corruption policies to maintain ethical business practices and compliance with regulations.
4. Reporting specific KPIs related to the above matters

How do the reporting frameworks differ from each other?

Navigating the landscape of data collection frameworks can often feel like a maze, with each framework presenting its own set of unique requirements and intricacies. Understanding these nuances is crucial, as they hold the key to pinpointing the most suitable framework tailored to the company's specific needs.

• Industry Focus: In what industrie(s) does my company operate?
  • Different reporting frameworks may place emphasis on specific ESG factors that are particularly relevant to certain industries. SASB standards, for example, are industry-specific and only list only the metrics that are financially material to each sector. For example, a company operating in the manufacturing industry reporting under SASB may be required to provide more detailed data on environmental impacts, such as energy consumption and emissions, compared to a service-based company. We have created a short summary of the SASB standards, which you can access here.
• Stakeholder Expectations: Which stakeholder(s) are interested in my data?some text
  • Reporting frameworks are often also developed based on the input from various stakeholders, including investors, regulators, NGOs, and industry experts. As a result, the variations in detail reflect the diverse expectations of these stakeholders regarding the type and depth of ESG information they require for decision-making and benchmarking purposes.
• Regional Regulations: In what jurisdiction(s) does my company conduct business?some text
  • Reporting frameworks may align with regional regulations and standards. For instance, frameworks used in Europe may have specific data requirements related to compliance with EU environmental directives, while frameworks in the US may emphasize aspects related to SEC (Securities and Exchange Commission) disclosure requirements. So it’s crucial to think about where will you conducing your business.

What are the biggest, most commonly used, reporting frameworks?

What are some of the challenges SMEs face when it comes to reporting on their metrics?

ESG reporting, just like for larger corporates, is bringing its own set of challenges for SMEs:

1. Financial constraints: As reporting requirements grow, the amount of resources SMEs can dedicate to reporting does not necessarily grow with them. This inability to allocate increasing resources to ESG reporting differentiates SMEs from Large companies and creates a divide in the data that can be delivered, both in quality and quantity.  In addition, SMEs are less likely to possess the resources that larger companies can use to invest in “bypasses” such as consultants or tools to improve their reporting capabilities.
2. Lack of expertise: As smaller and sometimes younger enterprises SMEs may lack the skill and knowledge to understand, collect, and share the requested data, in a way that meets EU/US/UK standards. This is considering that without additional funds for training or hiring, the burden of reporting may fall only on the existing human resources of the enterprise, as our team has seen firsthand.
3. Absence of existing data: Setting up robust data collection processes is complex and expensive for smaller companies. This process may be further complicated by the possibility of that data not being there at all. Ultimately, the issue of ESG reporting does not only fall on the inability to report, but also on the inability to have the information needed.

Our goal at Tese, is to simplify this process and assist you where there are knowledge gaps. We are aware of the challenges you may face as an SME and are here to help you overcome those. So sign up today!

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