CSR* Strategy – Do smaller and private companies need to publish a sustainability report?
The smaller a company is, the less they tend to publish a CSR policy or a sustainability report. I see this when doing ESG research on Nordic small caps and private HY issuers. This is even more true once you enter the unlisted Nordic small cap segment. The first thing small companies start to publish on is Governance, but even that is often too thin.
What sustainability encompasses here
A CSR policy or a sustainability report is expected to include the company’s status and action plans in the area of Environment (E) and Social (S). The latter can be split into two; Social (inside the company) and Societal (outside the company). As an ESG analyst, I would be happy to also see the Governance (G) update dealt with in the same report. This, because we would have all ESG factors gathered in the same report.
Legal and regulatory sustainability requirements
The EU Sustainable Finance package has up until now required that companies with over 500 employees to report on extra financial data. But the companies with less than 500 employees was not imposed the same reporting. Of course, many companies in the last group realise this is important and do this on a «voluntary» basis. And it is today clearly to their advantage as the relevant stake holders can see that the company takes this seriously.
At the same time the EU is enforcing regulation on banks and investors (both capital owners and asset managers) to report on the «sustainability degree» of their investment activity and their investments. They will also very soon report on the degree of «Do No Harm» of their investments. This is mainly to redirect capital in a GHG (Green House Gases) reducing direction and to avoid “geenwashing” (products claiming wrongly they are “green” and contributing to the for instance COP 21’s 2 degree target).
Bear in mind that a lot of this is coming live in the next 2 years, with the first deadline 10 Mars 2021. The pressure is high and increasing.
The EU is now mainly focusing on the CO2 emissions, but will broaden their scope both within the Environmental part and the Social part.
Reporting requires, data and this is the big issue today. ESG analysts are analysing the companies to build the data. The smaller a company is the less there is to buy and to build from. They represent a «problem» for investors and when you seek capital you do not wish to have «problems» in your file.
Investors will require a CSR policy as a minimum and would like a sustainability report. All parties know, and today and even more tomorrow, with nothing of this, a company is making itself less and less investible. There is increasing pressure now from regulators, the public, clients and suppliers.
For a private company, there is no need to worry about the investors, fine. But there may be a bank loan and what will the banks require tomorrow? Banks already exclude certain client activities as a result of EU Sustainable Finance. Examples are coal and unconventional oil and gas. It is hard to see a questionnaire in the bank without Sustainability elements to answer. Also, Private Equity investors are integrating ESG more and more in their investment processes.
How to get this CSR or Sustainability report in place?
The first step is to make a thorough ESG analysis of the company. It will get all lacking and weak ESG factors break the surface. Compared to investor or bank requirements a gap analysis should be made. Thereafter each element must be addressed. Finally, the company should publish ESG information, the CSR policy and the sustainability report. The latter can be a separate report or a part of the annual report.
The main point for small and/or private companies having a CSR policy or sustainability report
Clients, employees, banks and investors (stakeholders) will require a clear CSR policy at least and preferably a sustainability report. This is changing very fast and there is a lot to do. If you do not have this, begin now! It is a better story to tell stakeholders that you are working on this rather then that you are ignoring this.
And remember, for most financial investors, sustainability is not about reaching the COP 21’s 2 degree target (as not part of the Fiduciary Duty owed to most of their clients today), but to rather to ensure they invest in companies with a sustainable business model, i.e. a business model that will thrive in the long run. As a side effect they may contribute to the 2 degree target though, as you allocate capital away from the companies running potential high risks trough their activities emitting a lot of GHG…
So, all smaller and private companies can through CSR policies and sustainability reports help stakeholders like employees, banks, investors, clients and suppliers understand they they are working to stay in business for a long time. A clear advantage I would say!
Any thoughts out there?
PS. See here how investors should consider the small cap bias; lacking CSR, ESG data and sustainability reports and do something about it. DS.
*CSR – Corporate Social Responsibility
** ESG – Environmental, Social and Governance factors