Your Sustainable Supply Chain: It’s Time For Microcaps To Report On ESG

‍As the old saying goes, “If you are not taking care of your customer,  your competitor will.” 

With the start of a new year, comes a fresh list of priorities for microcap organizations.  But what does caring for your customer  mean in 2023? 

Climate change is on everyone’s radar. The game changing US climate Bill (the Inflation Reduction Act)  of 2022, underscores that every investor, company  and member of the public has direct exposure to climate change, and that we need unambiguous in formation about how organizations are contributing  to greenhouse gas emissions. As for Environmental,  Social & Governance (ESG)? It’s the mega-trend of  the decade. 

Reporting on non-financial activities is no longer just  for large corporations. The urgency for microcaps to  address their impact on our planet, and our society, is here. As for your stakeholders? They’re going to  continue to put the pressure on a commitment to  transparency. 

In this article, we’ll focus-in on ESG driven supply chain pressures that if your microcap isn’t already  experiencing, you’re likely to in the months ahead. 

ESG IS HERE TO STAY 

Action on ESG is essential for companies seeking  investor dollars, regulatory approvals, and the social  license to operate. As companies, large and small,  face increasing demands from their stakeholders, ESG disclosure is officially no longer a ‘nice to have’.  Under growing pressure from government regulators, investors, customers and employees, leaders of  listed companies understand the economic realities  of ESG – and its impact on people, planet and  prosperity. 

As demand for action intensifies, it will be increasingly important for companies to share comprehensive  information on tangible metrics and goals, and how  

they plan to achieve them. More than 90% of S&P  500 companies now publish ESG reports in some  form, and the US Securities and Exchange Commission (SEC) is considering requirements for detailed  disclosure of climate-related risks and emissions. 

INVESTORS CARE ABOUT ESG  

Today’s investors are deploying over $30T in capital  based ESG factors, and are influencing companies  to adopt ESG best practices. What’s more, 82% of  retail investors have reported an interest in backing  companies that are socially and environmentally  responsible, and 9/10 institutional investors are now  using ESG factors to make their decisions. 

Investors value transparency and clear communication about ESG initiatives and their potential impact  on performance and enterprise value. Many companies already have important ESG-related policies,  mechanisms and data in place. Yet measuring and  reporting on ESG seems to fall into the ‘too hard  basket’, even for listed companies. Avetta states:  

“Given the lack of transparency, many investors  are wary of the hidden ESG risks stemming from  complex supply chains of portfolio companies. To  manage exposure to supply chain risks, investors  are asking portfolio companies to integrate ESG  considerations into supply chain due diligence, risk  assessment, and compliance”. 

EMERGING GLOBAL REGULATION. 

Regulators around the world, including in the United  States, Australia, Canada and Europe, have passed  or proposed a variety of ESG requirements making  compliance a top of mind priority. 

While regulatory requirements and enforcements  vary around the world, it is universally expected  that mandatory disclosures will become increasingly prevalent. That’s why it’s important to start  benchmarking performance now – ideally against  a globally recognized framework like the World  Economic Forum’s Stakeholder Capitalism Metrics.  Being an early adopter can protect your company’s  market position while local regulations continue to  evolve – and will also give you a robust model for  mitigating compliance risks. 

CONSUMERS ARE DEMANDING ACTION 

Society expects companies to change, and consumers are looking for visible action on ESG goals. 

Forrester research suggests companies with a sustainability focus will generate revenue growth from  new opportunities, as well as improved employee  retention. 

What’s more, the 2023 Edelman Trust Index revealed that society expects businesses to leverage  their comparative advantage to inform debate and  deliver solutions on climate, with 82% looking for  CEO’s to act on climate change. Meanwhile, Forbes  reports the likes of Shell, Starbucks and IBM all  linking CEO salaries to ESG metrics. 

ESG reporting shows you are walking the talk. And  by sharing incremental progress with tangible  impact, it avoids being seen as ‘greenwashing’. Greenwashing is used to describe companies who publish  misleading and deceptive communications surrounding their commitments to climate change -- or a lack  of ESG progress after a big and bold statement. In  November 2022, for example, the SEC fined Gold man Sachs Asset Management $4M for not following  its ESG investments policies. 

As ESG implementation continues to rise, consumers,  alongside funders and regulators, are looking to  organizations to commit to genuine, actionable, and  visible positive change. 

ESG IN YOUR SUPPLY CHAIN 

With global investors, consumers and regulatory  bodies setting greater expectations of corporate  social responsibility, measuring and reporting ESG  information is becoming common-place. Multi national organizations are taking action by implementing frameworks such as The Task Force on  Climate Related Financial Disclosures (TCFD), which  asks companies to report on their Scope 1, 2, and  3 emissions. Scope 3 emissions include all indirect  emissions that occur in a company’s value chain. Even though these emissions are out of the control  of the reporting company, they can represent the  largest portion of its greenhouse gas emissions  inventory. 

As a result, organizations must set a plan, organize  and push down to their suppliers requesting for  various sets of ESG related information. What does  this mean for microcaps who rely heavily on large  corporations in their buying and selling practices?  The time to start ESG reporting is now. 

REAL-WORLD EXAMPLES  

ESG is mission critical for global supply chains.  Executives and supply chain leaders are meeting  the world’s net-zero challenge head-on. It’s about  committing today, or getting left behind. 

In 2022, General Motors launched a company-wide  initiative to drive its entire supply chain to report on  ESG driven criteria. Eventually, this will likely become  a requirement in doing business with the auto  manufacturer giant. 

Also in 2022, Apple, one of the largest companies in  

the world, enacted a plan to drive its supply chain to  address climate change, report on ESG criteria and  other actions. 

A 2021 McKinsey report found that two-thirds of an  organization’s ESG commitments lie with its suppliers. Choosing the right supplier partners and managing them well is perhaps the most impactful decision  a company can make when it comes to sustainability  - and one that shouldn’t be overlooked. 

A WIN FOR THE PLANET, A WIN FOR BUSINESS 

Given the ever increasing demands for businesses  to prioritize sustainability, ESG driven supply-chain  pressures are growing. The stakes are high with  ESG transparency becoming a condition of doing  business with many multinational organizations. By  starting their ESG journey today, microcaps can  unlock useful partnerships with these major players  while also leveraging their ESG position as a competitive advantage. 

The small and micro cap companies that get ahead  of ESG trends and start their journey sooner rather  than later will be in a better position to capitalize on  establishing closer relations with their large customers and win more business. 

As we work towards a more sustainable future, the  world will continue to expect more from microcaps.  My recommendation for microcaps across the globe  is to future-proof your operations by starting your  ESG journey today.  

Seth Forman
President of ESG 

Over 90 public companies and 70 non-profit organizations use Socialsuite for tracking and reporting on their impact. With the help of our ESG software and expert team, businesses can easily get started on impact reporting, disclose faster, and save money compared to traditional methods. Whether you're new to impact reporting or looking to enhance your current practices, Socialsuite offers the tools and expertise needed to achieve your sustainability goals. Contact us to learn more about our solutions.

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