The impact on businesses, and even more so supply chains, who are not taking into account the importance of ESG reporting are starting to feel the squeeze from shareholders and stakeholders.
In November 2021 at CoP26, the International Financial Reporting Standards (IFRS) Board announced the creation of the International Sustainability Standards Board (ISSB).
“The ISSB will sit alongside and work in close cooperation with the IASB, ensuring connectivity and compatibility between IFRS Accounting Standards and the ISSB’s standards—IFRS Sustainability Disclosure Standards. To ensure public interest legitimacy, both boards will be overseen by the Trustees, who are in turn accountable to a Monitoring Board of capital market authorities responsible for corporate reporting in their jurisdictions. The ISSB and the IASB will be independent, and their standards will complement each other to provide comprehensive information to investors and other providers of capital.”
Growing regulations, stock exchange requirements and corporate finance needs already require large corporates and listed entities to provide sustainability and ESG linked reporting. It is quite understandable why these entities are rushing to ensure that their ESG matters are in order, but the question remains, as an SME, is this important or necessary and, quite frankly, does is even matter?
The concern of business continuity sits at the core of answering ‘yes’ to this question.
Funding from investors and banks is being held for sustainable projects and green investments. Large retailers are requiring that their supply chains report on their sustainability, all the way down to the SME. Within the M&A space, there is an increasing request, from Equity Partners, for sustainability disclosures. Thus, business continuity, growth, transitions and even succession plans for business will eventually require ESG reporting.
Various studies have been undertaken to determine the value of sustainability reporting and the positive impact that it is having on business. Arabesque and the University of Oxford conducted research resulting in the most comprehensive knowledge base on sustainability as of 2015, evaluating more than 200 studies. They found that 90% of the studies indicated that sound sustainability standards decrease the cost of capital of companies and that 88% of the studies showed that solid ESG practices lead to improved operational performance. Good sustainability practices resulted in higher share prices in 80% of the studies. There are plentiful examples of corporate sustainability leaders reaping the financial benefits of sustainability initiatives.
With the recent regulatory development noted above and anticipated changes to further legal requirements and legislation, it makes business sense to report on sustainability, even for an SME.
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