COP26: ESG needs a top-down approach to be truly effective
Environmental, Social, and Corporate Governance (ESG) issues are fast becoming a key factor for investment decision making. The ethics and sustainability efforts of a business impact who invests and for how much. Despite ESG becoming a priority, many financial services professionals are still unclear about how organisations produce this data. In fact, a recent survey by CoreData Research found that over half (53%) of advisers have limited knowledge of ESG issues, while 42 per cent said more information would encourage them to increase their sustainable investing.
This is where a key problem arises. Investors are unaware that many organisations are unable to provide ESG data – not from a lack of interest or will, but because of external factors that make it harder for them to report on their impact. It is this challenge that the financial sector needs to play a greater part in – lowering the barriers to entry and creating more investment opportunities for the market.
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The ESG entrance fee
Most businesses struggle to source ESG data and produce the relevant reports due to one simple issue – cost. In most cases, companies need to spend tens of thousands of pounds on consultants to source this information. For those earlier on in their journey, where the priority is product development and sales, this cost is too high.
Even if a business is willing to spend on consultancy fees, it will still take a considerable amount of time to gather the relevant data. Companies will need to identify the material issues that matter to their stakeholders, cross-reference their own activity with that of suppliers, wait on third parties to share information as well as condense the reams of data into an accessible and appealing report for investors. It’s no wonder that many businesses simply give up on providing ESG data as a result.
Lack of data, lack of opportunity
It’s easy for investors to think that these challenges don’t affect them. But the reality is that companies unable to provide ESG data will only limit market opportunities.
The significant costs associated with producing ESG reports mean that early growth stage companies will often be the ones who miss out because investors will overlook these otherwise compelling businesses for ones that can demonstrate their ESG credentials.
By the time these smaller companies have grown, able to afford the production of ESG reports, it may be too late. These companies will have scaled and no longer offer the lucrative returns they had in their infancy.
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Leading from the top down
To receive a wider pool of investment opportunities, the financial community needs to get involved. Investors need to encourage companies to produce ESG data and educate them on the tools available to streamline the process, from those that provide industry benchmarks as a starting point for businesses when deciding what to report on, to others that enable carbon reduction in real-time. This top-down support will enable smaller companies to draw investors in while diversifying the market and giving investors more choice.
ESG is fast becoming business-as-usual, rather than a ‘nice to have’ for investors. However, there is still a widespread perception that ESG is only accessible to businesses with deep pockets. Financial institutions are in a powerful position to change this and not only open up more lucrative opportunities for investors but empower the businesses themselves to reap the financial and reputational benefits of doing business ethically and sustainably.
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