ESG reporting: the path to sustainability for the mid-market

In order for companies to integrate ESG issues into their business operations - and to make progress in other areas such as reporting on GHG emissions in their supply chain - they need to have a strong ESG position and transparent reporting mechanisms in place. To answer these questions, Grant Thornton has prepared its Third Sustainability Report, in which it once again analyses the level of preparedness of medium-sized companies with regard to sustainability reporting, and the communication efforts that companies are making in this area, both in Spain and globally.

"Everyone knows that tackling climate change and building a more sustainable future for all is the most important challenge we face for a generation," says Peter Bodin, CEO of Grant Thornton International Ltd. "Unless we take emissions reporting as seriously as the damage it causes, we will not make significant progress in the fight against climate change. That is why we are calling on governments and regulators to accelerate the publication and adoption of consistent sustainability reporting standards."

Many stakeholders are pushing companies to adopt a more ESG-focused business model, including shareholders, customers and companies' own staff.

"Investors and creditors make their investment and financing decisions influenced by a company's ESG practices. Therefore, having a strong ESG position can have a significant impact on the cost of capital," says Trent Gazzaway, global head of quality and service lines at Grant Thornton International.

"Customers also want more sustainable products, and more and more candidates are asking about the company's sustainability policies during job interviews," adds Esther Wolfs, partner in Grant Thornton's sustainable impact services unit in the Netherlands.

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But ESG issues are wide-ranging and mid-market companies need to be selective in addressing them. Among Grant Thornton's clients, the areas that are gaining ground are sustainability, accountability and social issues. In Spain, almost 35% of companies see aligning actions with the recommendations and reporting standards set by external bodies as a priority when preparing a first sustainability report. Another essential action for 34% of companies is to ensure the integration of ESG aspects at all levels of the company. Robust testing of the control environment that generates ESG information is another priority for more than 29% of Spanish medium-sized companies that produce sustainability reports. Furthermore, 25% consider it a priority to compare the information produced with that of other companies in the sector and to ensure that internal auditors scrutinise ESG reporting and methods of reporting on ESG actions. At the European level, 31% identify the need for robust control methods as the main action to prioritise, followed by the integration of sustainability at all departmental levels (for 28%). These figures are similar to the global average.

“Undoubtedly, the positive evolution of these data in recent years, which implies a greater commitment of mid-market companies to incorporate ESG actions in their strategies, reflects the progressive business awareness as well as the need to prioritise such actions in their different business models”, explains Jaime Romano, Partner expert in Sustainability Strategy at Grant Thornton Spain.

"Many mid-market companies are still in the early stages of their ESG journey. They tend to start when one of their clients asks them to calculate their carbon footprint," says Annie Sebelius, head of communications and sustainability at Grant Thornton in Sweden. "Companies want to understand their own carbon footprint and the regulatory requirements that exist in their sector. And the next step is the supply chain - what happens before the materials and products arrive at the company? They realise that their ESG work cannot be limited to their own company, but must be broadened in scope".

In fact, a notable element of the Grant Thornton report is that 32% of the Spanish mid-market acknowledges that they still do not report on any aspect of greenhouse gas emissions. Among the main reasons why they are not accountable for their emissions to the planet, 40% of Spanish companies believe that they do not generate sufficient levels in their activity to monitor them, while 13% believe that there is a lack of clarity about which specific aspects Spanish companies should report on. Another 13% believe that they have no goals or targets in the area of carbon emissions and for 10% it is too complicated to track and measure emissions through their supply chains.

Accountability as a catalyst for ESG measures

Key to understanding a company's ESG position and being able to track its impact on the supply chain is the need for accountability and reporting. For SMEs, most reporting remains voluntary and is often based on the TCFD (Task Force on Climate-related Financial Disclosures) framework. However, with the upcoming implementation of the ISSB international standards (see below the timeline for ESG reporting frameworks), reporting on scope 3 GHG emissions will become mandatory from the beginning of 2023.

"The mid-market is going to have to start holding itself accountable to ISSB standards, if it is not already doing so," says Sarah Carroll, director of sustainability reporting at Grant Thornton International. "Companies need to establish their own ESG strategy,

This means investing resources. Now is the time to see where to start and where to concentrate resources.

The United Nations Climate Change Conference (COP27), which took place in Egypt this November, put the spotlight on the measures that are needed to meet environmental targets - including reporting - with a particular focus on the implementation of the Paris Agreement on climate change. "The international community needs to work together to achieve the Paris goals and the mid-market is an important part of that community," says Esther Wolfs, "To achieve a net zero emissions future, companies need to look at how they can reduce their emissions, how they will join the green technology revolution and how to access climate finance to drive this adaptation.

This is an opportunity for companies to add value by meeting their ESG objectives. "Large companies will have a lot of work to do after COP27, as governments need support to take the necessary measures - so all companies in their value chains will have to get on board with these initiatives," says Sebelius.

Companies need to have a robust reporting structure in place to demonstrate their contribution to the Paris Agreement. Following the announcement of the establishment of the ISSB at COP26, the publication of a workable and universal framework in this area is getting closer.

"ESG accountability plays an important role. To make progress on sustainability, you need to have a solid strategy and goals, and then be able to back them up with reports that show that the company is making progress in this area," Carroll says. "Companies need to have that data and be able to interpret it.

“In this context, the control, quality and traceability of data in the ESG field is essential and makes auditors an indispensable part of guaranteeing and giving reliability to the entire reporting process, avoiding "green washing" and thus increasing stakeholder confidence”, says Sergi Puig-Serra, Partner expert in Non-Financial Assurance.

ESG priorities for mid-market companies

As part of the 2022 edition of the new Sustainability Report, Grant Thornton asked some 5,000 mid-market companies in 28 countries, 400 of them in Spain, about the GHG emissions information they currently report. In Spain, the main benefits reported by companies reporting (or planning to report) were contributing to their net zero emissions target (30%); followed by increasing competitive advantage in the sector (24%); increasing the company's preparedness to respond to climate-related risks (24%); and improving their preparedness to make informed and considered decisions about business sustainability (21%).

At the European level, we find very similar data to their Spanish counterparts. Thus, 30% recognise that the main benefit is that it will help to meet the necessary Net Zero objectives. On the other hand, 50% of the global mid-market identifies informed decision making as an essential reason.

Among the preparations being made by Spanish mid-market companies for the upcoming adoption of the ISSB standards, which will require companies to report on their Scope 1, 2 and 3 emissions, 38% report that they are still in the early stages of identifying the new developments and planning their approach. Meanwhile, 36% of employers say they are reviewing their internal reporting structure and processes to prepare for the entry into force of the new legislation. In addition, 26% of national executives acknowledge that they have taken a proactive approach and are already testing new reporting approaches before the ISSB standards become mandatory.

The same is true of European employers. Thirty-six percent of them recognise that they are still in the planning and internal review phase of their processes before the arrival of the regulation.

Jaime Romano explains that, “Consequently, obtaining information and its associated processes has become a priority for Spanish companies, which translates into the need to obtain and properly report data with a higher level of quality; this will result not only in the information generated in compliance with ISSB standards or other ESG aspects, but also in an overall improvement of the information that will favour an improvement in management and business decision-making.”

As Puig-Serra explains, the new Corporate Sustainability Reporting Directive (CSRD) and the new European reporting standards developed by the European Financial Reporting Advisory Group (EFRAG) should help mid-market companies to be clearer about the most important ESG aspects to report and how to report them, and should help companies plan their sustainability roadmap.

Despite the clear benefits, early adoption of these practices is constrained by the lack of guidelines regarding what data should be collected and how it should be communicated. "It's a question of what information to acquire and what to do with that data. Scenario analysis is complicated and many companies don't know where to start," says Carroll. This can be especially difficult for mid-market companies, which may not have the resources to implement their information objectives.

For GHG emissions, Scope 1 covers a company's direct emissions; Scope 2 focuses on indirect emissions from electricity purchased and used; and Scope 3 covers all other indirect emissions in the value chain. Among IBR respondents in Spain, more than half of Spanish companies (54%) report on Scope 1 and 2 emissions, but only 11% report on their Scope 3 emissions. However, 32% of the Spanish mid-market acknowledges that they do not yet report on any aspect of GHG emissions.

Of this percentage, 12% currently have no plans to report. This level, four points higher than the European average and eleven points above the global average, highlights the need for medium-sized companies to continue to drive ESG reporting.

“Consequently, Spanish companies still have a long way to go in adopting ESG best practices and, above all, in making their governing bodies aware of the importance of adopting ESG criteria in their medium- and long-term strategies, and not just as a mere regulatory obligation.”Jaime Romano explains.

This concern is compounded by the risk of ESG accountability losing weight in the current economic and geopolitical context. "On the one hand, COVID. On the other hand, the war in Ukraine. All this has led to a cost of living crisis, an energy crisis and a food crisis. ESG issues and their reporting must be a priority; companies need to be aware of the urgency of incorporating these issues into their strategy, given that the climate crisis is bigger than any of the other crises," warns Wolfs.

The time has come to act

ESG reporting obligations require immediate action and considerable investment. "Companies need to invest in resources, in training, in staff and perhaps also in external advice," says Carroll. "They need to understand what their obligations are, what Scope 1, 2 and 3 emissions are, and they need to start collecting this information. In order to be able to report in 2023, they will need to have a clear understanding of what happened in 2022, even if the ISSB final rule does not require them to provide comparative data," says Carroll.

"In the case of Scope 3 reporting obligations, it will be necessary to have data from the whole supply chain," he adds. "And another question on everyone's mind is how far down the supply chain do we need to go?

Grant Thornton is well positioned to help companies respond to changes in the ESG reporting agenda and transition to the ISSB's global reporting framework. Our consulting professionals can help companies develop effective ESG plans. Our tax professionals can identify tax-saving opportunities arising from ESG measures. And our audit professionals can conduct independent verification of the information presented," says Gazzaway.

"We help clients understand what is coming and provide valuable analysis on how these changes will affect the resilience of their business," adds Wolfs, "We connect their business to ESG priorities and assess their interdependencies and related impacts. They can then prepare the business in advance and respond to emerging risks and opportunities through a specific roadmap that enables them to navigate this changing environment."

Grant Thornton has extensive experience in the preparation and verification of reports adapted to current regulations covering almost all sectors of economic activity. This fact, together with the global vision of the Firm's specialised teams, allows us to offer our clients a comprehensive range of products and services, aligned with best practices, and contemplating an innovative and proactive vision of the impact of ESG actions on companies, explains Jaime Romano and adds Sergi Puig-Serra, from a vision focused on the client and their needs, we are prepared to accompany Spanish companies on their path towards sustainability and help them to adapt in an orderly manner to the coming "regulatory tsunami" in ESG matters.

If you would like us to help you boost your ESG reporting system and develop your ESG strategy, including a risk analysis and supply chain mapping, please contact Partners Jaime Romano and Sergi Puig-Serra.