In today's business landscape, the importance of sustainable business practices cannot be overstated. Investors, customers, financial institutions and community stakeholders are increasingly demanding greater transparency and accountability from businesses of all sizes. The recent release of sustainability-related financial disclosures, IFRS S1 and S2, has meant that from 2024 large corporations will be required to provide standardised Environmental, Social, and Governance (ESG) reporting. These changes will also impact on Small and Medium-sized Enterprises (SMEs), posing unique challenges on how to develop sustainable business practices along with the demonstrating this through accepted reporting principles. This article explores the greatest challenges that business, irrespective of size, face in preparing for the newly defined way of reporting, that is sustainability and ESG reporting.
One of the primary challenges that businesses encounter is a lack of awareness and understanding of what ESG means along with the current and future reporting expectations. Many small businesses in particular are largely unfamiliar with the significance of ESG factors on their operations and may view sustainability reporting as an optional or irrelevant endeavour. To overcome this obstacle, businesses must invest in educating their leadership teams and workforce on what ESG means for their business and industry including building awareness on the benefits derived from sustainable business practices. By fostering a culture of shared responsibility, businesses can pave the way for successful implementation of their sustainable business strategy with buy-in from all stakeholder groups.
Budget constraints are a constant reality for most businesses making it challenging to allocate funds and resources towards ESG reporting initiatives. Hiring ESG experts or consultants can be expensive, and many businesses simply cannot justify the cost. Moreover, diverting resources from other critical areas of the business can lead to greater operational challenges. To tackle this, businesses must recognise ESG reporting as an investment in future proofing the business rather than an item of immediate expense. Collaborating with industry associations and participating in knowledge-sharing networks can also prove beneficial, allowing small businesses to pool resources and their effective sustainable practices.
Accurate and reliable data is the backbone of any successful ESG reporting endeavour. One of the most significant difficulties faced by businesses is the capture, collection and consolidation of relevant data, especially when lacking in standardised data management processes. Additionally, maintaining data quality can be a persistent struggle, as it demands continuous monitoring and validation. To address this, businesses should consider moving towards comprehensive data collection methodologies, creating a centralised data repository, and implementing robust quality control measures. Automation and integration of data collection processes can also help streamline this aspect of ESG reporting.
The ESG reporting landscape is continually evolving, including the recent introduction of IFRS S1 and S2 that provide a framework and guidelines for large entities with industry specific considerations. Businesses may find it daunting to identify the measures relevant to their business factoring in their size, complexity and industry. Seeking advice from one of our ESG business advisor can help you kick start your ESG reporting journey as you gain experience and understanding of the ESG landscape. By fostering awareness, investing in suitable systems, and strategically allocating resources, businesses of all sizes can embrace ESG reporting as a driver of positive change and a catalyst for long-term success.