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.
