ESG is top of mind for many businesses right now, but with an increase in so-called 'greenwashing', how exactly can businesses quantify their global impact. The secret sauce is ESG data, and it could help improve access to funding – particularly for SMEs.
We caught up with Reynir Atlason, Director of Sustainability at Creditinfo Group, to find out more.
What role does data play in companies' ESG efforts, particularly SMEs?
In recent years, the demand for transparency on environmental, social, and governance (ESG) impact from businesses has grown. With developments across the world, such as the 2015 Paris Agreement on climate change, the 2020 EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) regulation, pushing these concerns to the top of mind for investors and financial institutions, ESG data has become a crucial way in which enterprises can quantify their global impact. Regulation around provisions of ESG data, including the EU taxonomy, has guided businesses but there’s a clear disparity between the types of businesses that can produce accurate ESG data on demand.
Even though SMEs make up 90% of businesses globally, with little to no regulatory pressure to provide ESG data, a significant data gap has appeared between SMEs and larger businesses. Although there are ways for SMEs to work out their relevant data indicators, the diversity of methodologies and the absence of primary data can result in marginally skewed results at best, very wrong at worst.
This brings certain challenges when it comes to accessing finance. As ESG concerns have risen, investors are increasingly interested in the climate and social impact of their decisions, and many have begun using ESG impact as a way of indicating how a business is managing risk in the long term. So how is ESG data used to provide a route to finance for SMEs?
Does the sustainable bonds market have a role to play?
With the cumulative green bond issuance from 2007 to 2021 surpassing US$1.5tn, the investor demand for sustainable options is undoubtably growing. Sustainable bonds, be that green bonds, social bonds, or transition bonds, have driven investment in environmentally or socially beneficial projects or businesses, or those in a transitory stage.
Data is the key to determining if a project is suitable for this type of investment, and judging if a project has met the standards after issuance, which in Europe, is laid out in the recently agreed EU Green Bond standard. So inevitably, SMEs who don’t have enough accurate data will struggle to access these types of credit options provided by financial institutions issuing bonds within the sustainability realm.
How does this help companies remain competitive?
Having high quality and accurate ESG data to hand will improve SMEs’ financing prospects. Staying on top of ESG consideration will certainly help businesses keep a competitive edge in the future.
Although SMEs remain exempt from the EU’s Taxonomy Regulation, this is likely to change in the future, as governing bodies continue to push for more sustainable business practices. The environmental and social amendments to the Companies Act in the UK are another sign that we can expect further amendments to economies across the globe, to embed across a whole economy. SMEs with the ability to prove their ESG impact to hand will have the competitive edge when it comes to pre-empting regulations that may impact their operation and ensure speedy compliance.
What can companies do more/better?
So, what is the key to improving ESG data availability for SMEs? One way is through harnessing a wider range of alternative sources of data. By using corporate ESG data, collected through annual reports, media, and legal records, SMEs have the potential to build a rounded and accurate ESG profile.
The problem is that this data is often disparate and difficult to collect and analyse efficiently. This is where technology comes in, allowing SMEs and financial institutions to automate the way in which ESG data can be evaluated, using less obvious sources, such as the media and court cases, to build an ESG profile for companies, no matter the size, type of operations and quantity of official ESG data published.
As ESG concerns continue to grow in importance, across the global economy, it is crucial that SMEs stay one step ahead. Harnessing the power of technology can level the playing field for SMEs, providing access to finance for underserved businesses and ensuring compliance in an increasingly complicated world of regulation.
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